Mises vs. Rothbard on Fractional Reserve Government-Interference

Economics Economics Questions
1

Mises and Rothbard had a disagreement about fractional reserve banking in that Mises said the government should not outlaw it, while Rothbard said the government indeed should. This seems to me a bit of a contradication as he said that without the governments help, fractioinal reserve banking would not be possible, so what would the reason be to prohibit it by law. While fractional reserve banking is a form of theft, if it couldn’t exist without the government, then why bother getting rid of it? Besides, that gives the government way too much control, of course.

If, however, you believe that it would be possible for the banks to fractional reserve without the governments help, then it might be a wise choice to do so. Can someone explain this contradication, and also can everyone give me who they side with and why on this issue?

2

No they didn’t. “White contra Mises on Fiduciary Media” - Joseph T. Salerno

… The main proponents of the neo–Currency School were Ludwig von Mises and Murray Rothbard. Both held firmly to the doctrine that the creation of fiduciary media by the banking system, whether “free” or governed by a central bank, inevitably generates business cycles. Mises initially believed that unregulated or “free banking” based on a gold standard was superior to the legal imposition of a 100-percent gold reserve requirement as a means for suppressing the issue of additional fiduciary media. In one of his later works, Mises did propose a plan for legally requiring a 100-percent reserve requirement for new currency and checking deposits.[3]

Rothbard ranked the effectiveness of the means for abolishing fiduciary media in reverse order than Mises, although in his last work addressing the question Rothbard proposed gold-based free banking as a temporary “second-best” solution for the problem.[4] Thus, Mises and Rothbard were united in their analysis of the disruptive effects of the creation of fiduciary media on the market economy. Their differences concerned only their evaluations of the alternative techniques available for achieving their shared goal of abolishing the ability of banks to issue new fiduciary media. […]

Concluded Mises,

[Fiduciary media] should logically be subjected to the same principles that have been established with regard to money proper; the same attempts should be made in their case as well to eliminate as far as possible human influence on the exchange ratio between money and other economic goods. The possibility of causing temporary fluctuations in the exchange ratios between goods of higher and of lower orders by the issue of fiduciary media, and the pernicious consequences connected with a divergence between the natural and money rates of interest, are circumstances leading to the same conclusion. Now it is obvious that the only way of eliminating human influence on the credit system is to suppress all further issue of fiduciary media. The basic conception of Peel’s Act ought to be restated and more completely implemented than it was in the England of his time by including the issue of credit in the form of bank balances within the legislative prohibition.…

It would be a mistake to assume that the modern organization of exchange is bound to continue to exist. It carries within itself the germ of its own destruction; the development of fiduciary media must necessarily lead to its breakdown.… It will be a task for the future to erect safeguards against the inflationary misuse of the monetary system by the government and against the extension of the circulation of fiduciary media by the banks.[15]

The only reasonable conclusion to be drawn from the passages that I have emphasized in the foregoing quotation is that Mises looked with great disfavor upon the creation of fiduciary media by banks, whether “free” or not, and strongly urged its elimination. And it should be reiterated that this was a position that he maintained from the very beginning of his career as a monetary theorist in 1912."

“Fraud wouldn’t be possible without governments help”? That isn’t Rothbard’s claim, so it’s a strawman… therein lies the reason for the ‘contradiction’.

3

But in America’s Great Depression (pages 31 to 32) Rothbard wrote:

“While unregulated private banking would be checked within narrow limits and would be far less inflationary than Central bank manipulation, the clearest way of preventing inflation is to outlaw fractional-reserve banking, and to impose a 100 per cent gold-reserve to all notes and deposits. Bank cartels, for example, are not very likely under unregulated, or “free” banking, but the could nevertheless occur [I guess I had read something wrong there]. Professor Mises, while recognizing the superior economic merits of 100 per cent gold money to free banking, prefers the latter because 100 per cent reserves would concede to the government control over banking, and government could easily change these requirements to conform to its inflationist bias. But a 100 per cent gold reserve requirement would not another administrative control by government; it would be part and parcel of the general libertarian legal prohibition against fraud…prohibition of such practices would not be an act of govenrment intervention in the free market, it would be part of the general legal defense of property against attack which a free market requires.”

So didn’t Mises support free-banking will Rothbard supported government defense of fractional reserve banking? Or did Mises change his position after Rothbard wrote America’s Great Depression?

4

Rothbard isn’t correct, imho:

But a 100 per cent gold reserve requirement would not another administrative control by government; it would be part and parcel of the general libertarian legal prohibition against fraud…prohibition of such practices would not be an act of govenrment intervention in the free market, it would be part of the general legal defense of property against attack which a free market requires.

Then we might as well throw in PDAs and the like. They protect property. Hence, the government can provide police and the whole AnCap position flies out of the window.

I do not believe that counterfeit currency can be punished without contract…

Anyway, I thought most people on these boards are for free banking as opposed to 100% reserve.

5

Did you read the article? That’s addressed.

“[I guess I had read something wrong there]”

Happens to the best of us.

AEN: What about the argument that 100% reserves requires government intervention?

MNR: I regard fractional-reserve banking as an intervention in the free market, just as any crime against person and property is intervention. In the case of banking, the government is allowing the crime to be committed.

But how do we address the needs of trade argument, those who say that business has a demand for credit? Well, there are many things demanded on the market that are also crimes. There may be a demand for killing redheads. And there is certainly a demand for government loot. What’s so great about market demand? if it is not within a framework of non-aggression, there will always be a demand for fraud and theft.

The free bankers accept a kind of David Friedmanite anarchism, where there is no law, only people engaging in exchange and buying people out. If you have a group that wants to kill redheads, the redheads will have to buy them off if they value their hair. I think this is monstrous, the kind of anarchism would indeed be chaos. Just because there is a demand for something doesn’t mean it should be fulfilled.

AEN: One of the criticisms of this position is that it is normative and not economic.

MNR: Yes, but the response to 100% reserves is that bank entrepreneurs have the right to offer whatever fraction of deposits they want, which is also a normative position. Any discussion of policy is inherently normative. You can’t have free markets unless you have property rights,

AEN: Why isn’t private deposit insurance viable?

MNR: The same reason insuring any bankrupt industry isn’t viable. You cannot insure entrepreneurs because they engage in uninsurable risk. You can reasonably predict how many fires there will be in New York; the unlucky few who get burned can dip into the pool of resources. But entrepreneurship is not heterogeneous; it is completely unpredictable, and each attempt is non-random. The entrepreneurs assumes the risk. If an insurance company insures it, it becomes the entrepreneur. Who then insures the insurer? In the case of banks, either they don’t need insurance, since they are 100% covered, or they are uninsurable because they are taking entrepreneurial risk.

AEN: You have been critical of White’s book on free banking.

MNR: The White book says the Scottish banking system was more successful than the English system. But he doesn’t say one word about prices, inflation, or business cycles. His only statistic is that were fewer bank failures in Scotland than Britain. But what’s so great about not having failures? An industry that doesn’t have failures might be doing poorly. What if we applied this test to the Soviet Union, where no industries fail?

When you say one banking system is more successful than another, it seems the test should be less inflation and fewer business cycles. Yet this is never mentioned.

So didn’t Mises support free-banking will Rothbard supported government defense of fractional reserve banking? Or did Mises change his position after Rothbard wrote America’s Great Depression?

"I conclude, then, that White’s attempt to portray Mises’s views on fractional reserves and free banking as prototypical of the modern free-banking school is untenable. To the extent that Mises advocated the unrestricted freedom of banks to issue fiduciary media, he did so only because his analysis led to the conclusion that this policy would result in a money supply strictly regulated according to the currency principle, that is, changing dollar for dollar with the supply of gold money.

Mises’s desideratum was thus not a “neutral” money, or even a practical approximation of it; rather, it was the complete elimination of “human influence” on the purchasing power of money. Along with government fiat-money inflation, this included the distortive influence of bank-created fiduciary media on monetary calculation and the dynamic market process. Whether this result was best achieved by “free banking” or a legally mandated marginal 100-percent rule, Mises considered a secondary question of policy technique."

6

"Then we might as well throw in PDAs and the like. They protect property. Hence, the government can provide police and the whole AnCap position flies out of the window.

I do not believe that counterfeit currency can be punished without contract…

Anyway, I thought most people on these boards are for free banking as opposed to 100% reserve."

Lmao, no. The state has no role, ipso facto. But given the context, it is less ‘unjustified’ than the alternative… promotion exactly what we have now, which was allowed into being - to re-kindle exactly because of FRB.

Right, well then whoever that is, is at odds with pretty much the entire intellectual Austro-Libertarian movement scholars… De Soto, Block, Hoppe, Rothbard, Hulsmann, Ron Paul etc.

“That reform is simply that all promises to pay on demand, whether made in the form of notes or deposits, be backed 100 percent by whatever is promised, be it silver, gold, or watermelons. If there is any failure to carry 100 percent reserves or to make delivery when demanded, such persons or institutions would be subject to severe penalties. The fractional reserve system has created the business cycle, and if that is to be eliminated, its cause must be also.” ~ Ron Paul

7

Yeah, I guess he’s saying that this fractional-reserve banking is so detrimental, it would be the cornerstone of the legal philosophy, thus keeping it from becoming expounded as you said. However, in such a system, it is inevitable, as history has shown quite painfully, that those principals will eventually break down. What was the main principal of the United States Constition has completely gone away now. Besides, how would the government go about moinitoring such a thing? Even looking at all the bank statements could easily lead to abuse of power. And money would no doubt be changing hands in order to change things. You can’t pay off the entire public like that in a free society.

But I guess Rothbard was concerned that in a free society, banks could just merge and expand together even though he points out earlier (page 30), “…such an agreement would be difficult to acheieve.” I’m not sure that if we banned it, though, we wouldn’t be right back where we are now in a few hundred years.

8

So are you saying that Mises didn’t care whether the banks were free or whether they 100% requirements? The article says there was a disagreement as to which would be better for abolishing inflationary banks. I understand that they had a basic agreement on that creation of fidicuary media had to stop, but they indeed disagreed on the best way to get there, did they not? Could you please tell me who you believe was right in this dispute, and for what reasons?

9

I tend to prefer Mises to Rothbard on most issues mainly because of Rothbard’s deference to objective/normative morality/values. There is no universal/objective/normative/cosmic law against fractional reserve banking, nor against fraud for that matter. “Free” fracR banking is theoretically/praxeologically unsustainable. Empirically/historically, it has always ended in: (1) collapse/run, or (2) central (government monopoly) banking. One only needs to guarantee that government (force) gets out of the way – the market would “outlaw” fracR banking most expediently and efficiently, just like it “outlaws” fraud.

10

Since when have we started looking at history to back Austrian claims?

If we look at history, free markets themselves have always led to government regulation…