Steven Horwitz: Do We Really Need A Central Bank?

Economics Economics Questions
41

What’s my defintion? I thought you agree that the definition is meaningless

Hayek is nearly always talking about systems with government intervention. This isn’t relevant to free markets where deflationary pressures are not the result of the unwinding of the previous credit expansion. I think you’re trying to get too much out of Hayek’s writings with respect to free banking.

Because he assumes fractional reserve banks still exist. Am I wrong? Does he attribute the cause to anything else?

I think Mises examined this issue more in depth in Human Action. The issuing of fiduciary media will be extremely limited if not eliminated altogether. Rothbard simply elaborated on this.

If I recall correctly, he doesn’t think its possible because it wouldn’t be politically feasible. Why unsound? I don’t recall any such comment by him. In fact, if there was ever a chance for Hayek to criticize 100% on the grounds that it would be unproductive, that was the opportunity. But he didn’t! He remaind consistent on this matter; Fiduciary media of any amount causes a cyclical behavior

42

It doesn’t sound like you are that familiar with Rothbard to make that accusation.

43

You are confusing fiat with fiduciary media. (And fiduciary media is not “made out of thin air”)

44

I never said it was meaningless. What I said is that the focus shouldn’t be placed on the aggregate level of prices per se but only upon the subjective valuations of consumers and producers who face a newly increased stock of money, and how this misdirects resources and disturbs market processes. But the definition is very important since my definition allows for bad deflation, something which exists.

Okay, so you choose to ignore the fact that Hayek in Monetary Theory and The Trade cycle investigates a free monetary economy and doesn’t even mention government intervention (he first ventures into a theoretical barter economy where there’s only the natural rate and therefore no disturbances). And the fact that he believes that trade cycles are entirely unavoidable, even in a purely free economic system. I don’t want to get into Monetary Theory and The Trade Cycle because he’s kind of all over the place and I have to re-read it, but the point is that he’s not talking about government intervention.

He attributes it to disparity between the market and natural rate which doesn’t presuppose FRB. FRB can cause business cycles insofar as it reduces the market rate relative to the natural rate if the supply of money exceeds the demand for cash holdings. Which is why I mention part 4 of Prices and Production. 100% reserve rates would replace the boom-bust cycle with perpetual quasi-slumps, which actually sounds pretty good to me–but I’m interested in theory.

Have you read Monetary Nationalism and International Stability?

45

Horwitz himself on deflation.

46

Of course it is possible to have a natural rate with fractional reserves? As long as the bank doesn’t literally go bankrupt - instead of the Rothbardian ‘the bank is bankrupt the moment it lends out more money than it has in his vault’ - then it is possible to adhere to the natural rate. Even if you dismiss fractional reserve because it is fraud, that doesn’t necassirly mean it can’t be economicly viable.

And I don’t really get the fraud example: saying that fractional reserve banking is fraud, is saying that is literly impossible to design a contract in that way that it can’t ‘look’ or ‘act’ like a fractional reserve bank. It’s like the slavery thing; people dismiss it because ‘you can’t alienate the will’ (cfr. the Rothbardian position.) But it doesn’t really take a genius to figur out that you can write down a contract in that way that it is possible to have a ‘slave contract’ (cfr. the Kinsella position). Even if you don’t agree with this position, just because ‘alienating the will’ can’t happen, isn’t really an argument.

I always look at frac. reserve banking contracts as something like ‘given the other guy the unilateral right of demanding a piece of your property’. No ‘property conflict arises’. He owns the unilateral right to demand a piece of your property, but not the property itself. That’s the whole point of defining money as a ‘bankliability’ and not as ’ warehouseticket’.

Yes, fractional reserve banking could be fraud; if the contract was defined and understood as a warehousticket. But if it’s clear that it is a bankliability - and I see no theoretical problems with the possibility of defining in that way, even though throughout history it hasn’t happened ina way that would suffice Rothbardians/De Sotoians - what’s the big problem?

47

‘Temporary store of value’? I’m not sure, but didn’t Rothbard debunk that idea?

48

You don’t have to ‘agree’ with him (obviously not; nobody ‘has’ to agree with anyone on anything), but what I find ‘mind-boggling’ is that you find his theory ‘mind-boggling’. Monetary equilibrium has been a part of the Austrian school (and the debates therein) for 20 or something like that years now. At least, you should understand the position where he’s coming from, which is not ‘that’ mind-boggling, imo.

And even because you disagree; I see no real reason to say something that you don’t ‘respect’ him. But then again; maybe we think differently about terms like that. :slight_smile:

49

So you think central planning is more efficient?

50

Since 1896.

Money acts as a store of value solely because it is a medium of exchange. The functionality of money as money stems from its ability to facilitate exchange. But, as I’ve already mentioned, when people talk about the scarcity or plentifulness of capital, they are really talking about the quantity of money available (capital is always scarce and never plentiful). In modern monetary economies money is demanded for capital investment since banks don’t really lend real capital, but money which will eventually purchase real capital. Money is not capital, but people demand it as such.

Banks are technically illiquid as soon as they lend more money than has been entrusted to them. And all banks will eventually fail, the same way that all companies will eventually fail.

Indeed. People accept the potential failure because (a) they earn interest on their savings instead of paying fees, (b) they find a solid bank which is reputable, (c) hope that in the case of a failure the banks will be able to repay them with a moratorium/liquidation. If one feels that it’s too risky, then one is free to leave his savings at the local warehouse. If it happens that the market drives banks towards 100% reserve ratios then so be it, but I don’t see how one gets to this position. In fact, such an assertion is more of a prophecy than actual sound economic analysis.

51

It’s actually a prediction based on sound economic analysis and simple logic. Try opening a Fractional Reserve Car Dealership (FRCD) and start experimenting with various reserve ratios (to discern the market’s “demand for cars”): You have 10 cars in your lot. Sell Car1 to one person (give him a sales contract in exchange for his cash and tell him to come next week to pick it up.). Sell Car2 to two people (50% FRCD). Sell Car3 to three people (33% FRCD)…Sell Car10 to ten people (10% FRCD). Then next week, when all these people come to demand their cars, simply compare the number of your bruises and your bones broken by each car’s group. The one resulting in least bruises and broken bones should point you to the “optimal” reserve ratio you should stick to in the future. My economic analysis (and your education, if you survive the grueling tuition) points to 100% being the “optimal” one. Let me know what ratio you come up with.

Now if the above lesson works for cars, iPods, sacks of potatoes, and pretty much EVERYTHING traded in a free market, why on earth wouldn’t it work for the commodity (or things) the market decides to use as a universal medium of exchange (money)? If money can be exchanged for any of these other items, why would you even contemplate the viability of ridiculous schemes that would assign it some special status? I am aware that people have invested decades and careers elaborating these schemes, and it must be very hard for them to face a simple truth/reality, but that’s not my problem, really. I say, tough luck, but the sooner they cut their losses and wake up, the better.

Z.

52

You cannot drive a claim to cars, but you can exchange it.

53

Yes. You cannot drive a non-existent car, either. By exchanging your claim to the non-existent car (for something of actual value) with someone else you’ve merely passed the fraud along, i.e. simply changed the person that’s going to break the dealer’s bones next week. That’s progress!

Z.

54

But he clearly is. When he is revealing the mechanics of credit expansion, he is not analyzing some hypothetical free system, but the present FRB system. He attributes the trade cycle to the mechanics of Fractional Reserve Banking under the present system.

I agree , so maybe you should quit capitalizing on every statement he makes. There are things that he says there that he later on takes back.

FRB would have to avoid the multiplier factor in order for them to actually do this. I don’t see how this is possible.

There is nothing in capital theory to suggest this.

The coordination that takes place during an increase in demand to hold cash is identical to any other form of increase in time preference. The same response for the “Paradox of Thrift” applies to an increase or decrease in demand to hold. This is what Mises was saying in the quote that I provided to you about this.

Yes, and I seem to recall his positive approval of 100% reserves idea in theory at least.

55

In the first part you correctly identify a special feature of FRB, but then you justify it by an irrelevant irrefutable truth. Sort of like “in the long run, we’re all dead”

Here is another inherent feature of only FRB that proves its unsoundness and that any comparison with regular business uncertainty is false.

Another way of looking at the essential and inherent unsoundness

of fractional reserve banking is to note a crucial rule

of sound financial management - one that is observed everywhere

except in the banking business. Namely, that the time

structure of the firm’s assets should be no longer than the time structure

of its liabilities. In short, suppose that a firm has a note of $1

million due to creditors next January 1, and $5 million due the

following January 1. If it knows what is good for it, it will arrange

to have assets of the same amount falling due on these

dates or a bit earlier. That is, it will have $1 million coming due

to it before or on January 1, and $5 million by the year following.

Its time structure of assets is no longer, and preferably a bit

shorter, than its liabilities coming due. But deposit banks do not

and cannot observe this rule. On the contrary, its liabilities - its

warehouse receipts-are due instantly, on demand, while its

outstanding loans to debtors are inevitably available only after

some time period, short or long as the case may be. A bank’s

assets are always “longer” than its liabilities, which are instantaneous.

Put another way, a bank is always inherently bankrupt,

and would actually become so if its depositors all woke up to

the fact that the money they believe to be available on demand

is actually not there. (Mystery of Banking, pp - 99)