Legal free-market regulated "fractional reserve".

Economics Economics Questions
1

Ok, I understand that the fractional reserve debate may have come up a lot here. If my question has been discused please point me to it. Also, any article or book arround this idea would be welcome.

First of all, I dont have a solid opinion yet on fractional reserve banking. I was completely against it at the beggining, because I believe its dangerous and gives a lot of power to the banks, and also creates bums and bust, but on the other hand, its something that it has happened all over history and its very difficult to control. So I am still reading and thinking about it.

I have read that fractional reserve could be considered fraud (wich I believe it is in its present form), so you would not need regulations to forbid fractional reserve. Just enforcing contracts you can get rid of fractional reserve.

Now, imagine you live in a society where fractional reserve banking is considered fraud. A bank decides to emit a note that its 50% backed by gold and 50% backed by a loan the bank has made, and it is clearly stated in the note. It is written there that what its backing that note is 50% of a gold deposit on the bank, and 50% a loan that the bank made. Anyone can accept or reject that note voluntarely and when they accept it they know exactly the conditions they are accepting, because it is clearly written on the note. ¿What’s wrong with that? I can not see nothing wrong with that. In case the bank fails, you would get the 50% gold that (suposedly) is in deposit, and you could try to recover the other 50% from what the bank would get from liquidating its debts.

This system would be some kind of legal free-market regulated “fractional reserve”. The main difference with the present system is that the people would have information and some control over how much the bank can over-extend itself. Its not the bank alone that decides how many reserve its going to keep. Now the costumer can also decide wich type of note he/she wants, and how much risk its going to accept. So its a fractional reserve system, but the costumer has a lot more control and information than in the present system.

Opinions?

2

imagine you live in a society where fractional reserve banking is considered fraud. A bank decides to emit a note that its 50% backed by gold and 50% backed by a loan the bank has made, and it is clearly stated in the note. It is written there that what its backing that note is 50% of a gold deposit on the bank, and 50% a loan that the bank made. Anyone can accept or reject that note voluntarely and when they accept it they know exactly the conditions they are accepting, because it is clearly written on the note.

would you accept such a note?

3

i dont know if the type notes as you describe have actually been a prevalent exchange media in an economy before.

it may be that they have and the rothbard has written (if true) that generally, the more fractional-reserve that takes place or unredeemble-notes that have begun to circulate the more banking problems that have occurred. whereas, as i have read:

"suffer a one-shot deflationary contraction of the fraudulent fractional-reserve banking system, and go back to a sound system of 100% reserves."

http://mises.org/Econsense/ch78.asp

that 100% reserves dont generate any money and banking problems on a larger scale.

4

Probably not, but that its not the point. I am sure there would be a merket for that, specially under some conditions. And I am not a good example because I keep my money out of the bank, except for the month expenses, so obviously I am very wary towards that, but I dont consider I can stop others from doing it.

My point is that, to stop it, you would have to regulate the market. Otherwise that note is a legal contract.

Economics is just a hobby for me, my main ocupation is engineering so maybe someone else can give a better example, but I watched a video of a Mises Institute conference where someone was talking about the private coins that appeared in the UK in the early days of the industrial revolution. They were fractional, because their weight was not the face value. You could go to the one who minted them and exchange it for the whole weight. And it seems the value of the metals fluctuated but the coins adjusted its fractional value, just through the presure of competition. They were not gold and silver coins, but mainly cheaper coins and that its the reason they were fractional.

I searched the video. Is a very interesting video. Spoiler: I found very funny that this coins disapeared not because they did not work, but because they worked so well, that the king ended up forbiding them.

Note that there is a difference between the fractional reserve system of the XIX century in the USA and what I am discusing here. In the XIX century the notes did not specify how much part of the gold they represented was in the bank and how much was really loaned. You just have to trust (or not) the bank. If the bank over-extended it was hard for you to tell. With what I am proposing the client, the consumer knows how much is in deposit and how much is loaned, and can decide to accept the note or reject it. So its kind of transfering the power to decide how much to over-extend from the bankers to the consumers. Obviously the banker could lie about the gold that it had on deposit, but since it has a legal way of over-extend alredy the temptation is way smaller.

If anyone has any example of private coinage with fractional reserve in a free market like the one in the video I would apreciate the information.

5

would you accept such a note?

Probably not, but that its not the point

it was my point.

6

Mises Institute conference where someone was talking about the private coins that appeared in the UK in the early days of the industrial revolution. They were fractional, because their weight was not the face value. You could go to the one who minted them and exchange it for the whole weight. And it seems the value of the metals fluctuated but the coins adjusted its fractional value, just through the presure of competition. They were not gold and silver coins, but mainly cheaper coins and that its the reason they were fractional.

i dont think that is fractional…it sounds like you described a token coin…the same as a note for a specific weight of metal , that actually exists.

exchange the coin for the full weight of another coin? or just a weight of un-coined metal ? and a different variety of metal at that???

if you could get a greater amount of silver than a silver coin itself had…everyone would flock to get more silver ‘weight’ and make their own trading media with the bonus.

the mises people arent above lying either.

and if it took an king or some lame monarch to start it anyway..it wasnt much of a market coin or note.

7

i thought parliment had a solid role during the industrial revolution anyway.

8

Do you accept cheques? And debit cards?

9

“I have read that fractional reserve could be considered fraud (wich I believe it is in its present form), so you would not need regulations to forbid fractional reserve. Just enforcing contracts you can get rid of fractional reserve.”

if you can contract an unbacked liability it wouldnt necessarily get rid of frb…though it might look a lot less desirable. i dont know that the ‘dollar’ is in anyway a contract.

you and this regulation crap. i posted a rothbard excerpt earlier…ill post them again since you havent bothered to look for them.

"A requirement that banks act as any other warehouse, and that they keep their demand liabilities fully covered, that is, that they engage only in 100 percent banking, would quickly and completely put an end to the fraud…"

a requirement?? i assume he is speaking from an nearly-existing govt framework as we have now…as fraud is handled elswhere.

"While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative. But how to achieve this system, and as rapidly as humanly possible?"

outlawing would be nice he says…i assume because he feels that unbacked liabilities of any type are fraud and bad and do harm. perhaps abnking problems over the years have led the rothbard to that conclusion amidst economic growth??

"(d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. "

i dont know that the rothbard means the fbi or cia foring the bank to close or a market driven removal of unbacked liability business.

forcing something into bankruptcy?? that seems only possible via a removal of business from such an organization.

it is poorly written.

http://mises.org/Books/mysteryofbanking.pdf

10

would you accept such a note?

Probably not, but that its not the point

it was my point.

Do you accept cheques? And debit cards?

if i knew they were from you i wouldnt.

11

The reason this private coins appeared was that all the low value coins allways ended up in the south and the north had shortage of them. So they were mainly low value coins, tokens like you said. So what you describe did not happen because their main use was as means of exchange.

_**

No, it did not take the king to start them. They appeared because there was the problem I described above and the market solved it. But this coins worked so well that they became a thread to the goverment system, so the king ended up forbiding them.

12

The reason this private coins appeared was that all the low value coins allways ended up in the south and the north had shortage of them. So they were mainly low value coins, tokens like you said. So what you describe did not happen because their main use was as means of exchange.

that doesnt make much sense.

were the low value coins private as well? and if the coins ended up in the south…i assume the north had goods that they needed. when the north traded goods they would get coins back. i belive the mises video you watched my be non factual.

13

A bank decides to emit a note that its 50% backed by gold and 50% backed by a loan the bank has made, and it is clearly stated in the note. It is written there that what its backing that note is 50% of a gold deposit on the bank, and 50% a loan that the bank made. Anyone can accept or reject that note voluntarely and when they accept it they know exactly the conditions they are accepting, because it is clearly written on the note. ¿What’s wrong with that?

This system would be some kind of legal free-market regulated “fractional reserve”.

you tell me. unless the note somehow gave a title claim for the loan payers property…and then how would you claim it? maybe thats whats wrong with it.

one half of the note means redeem some silver and the other half…a kitchen remodel? the payees kids college education?

such a note does seem near impossible to redeem but i suppose could circulate based on someones faith that the bank would get repaid…and the backing of a specific amount of silver.

i guess some would call it fraud because 1/2 the backing would be unrealized (backing with whats not there) and it seems that ‘backing means backing’…what is at the back, iow. personally i think that fraud would have to mean that someone didnt know what was going on…the rothbard may view the govt money as fraud because of its ongoing nature.

so calling a loan backing may be inappropriate. what you would call the ‘stuff’ that would make the note desireable to circulate (aside from the silver claim) i am not exactly sure how to word it…1/2 backed by silver and 1/2 not-backed but speculated or envisioned to have worth…or something like that.