Anybody aware of empirical or theoretical work on the the inflationary/deflationary effect of currently existing commercial FRB vs. the more direct actions of central banks like the Fed? I’m trying to figure out which one artificially distorts the money supply more (if the former does at all).
I’m not aware of it, but I would think that central banks distort more. This is because they have the support of the central government and have exclusive control of the currency. With private banks, people can simply move to banks with better business practices. You can’t do much if the Fed decides to inflate the currency.
That’s what I’m thinking and want to argue; commercial “fractional reserve banking” is not the problem, or at least not a comparatively significant one (contra crazy Zeitgeisters et al.). Central banks are the problem because they have a unique ability to (effectively) print money out of thin air and we’re all forced to use that currency via tax laws and legal tender laws. The state distorts commercial bank practice through regulations, licencing, deposit insurance, and other things… however the distortionary effect of current-day commerical fractional reserve banking is comparatively negligble.
Actually, without expansionary monetary policy, banks may be unable to increase the money supply enough to prevent distortions. Reserve requirements place a ceiling on the amount that a bank can lend; this can be less than depositors are saving by holding account balances. In this case, spending on investment can fall below desired investment, i.e. resources are being withdrawn from previous uses but not redeployed for any alternative end. Because of the artificial floor on reserve ratios, the Federal Reserve must step in and increase the supply of base money to offset the deficit in investment spending.
What kills more people, guns or bullets?
MT, so your position is that state-enforced reserve requirements on commercial banks artificially deflate the money supply, which reduces lendable funds and thus investment below the would-be free banking optimum? Or are you arguing for state monetary intervention ab inito? If it’s merely the latter, I believe there’s some currency to that idea; the purely inflationary distortion predicted by most ABCTers is oversimplistic (but not wrong). If it’s the former, you’d have to start with a definition and theory of the state first.
Also, where did the quote from your signature line come from?
Cal,
Reserve requirements are like price controls. Suppose the government decided to set a price ceiling of $500 per banana. The market price of bananas is well below $500; no transactions are being frustrated. The price ceiling is irrelevant to the allocation of resources.
So long as the optimal reserve ratios of banks are greater than the reserve requirements, there is no practical consequence. However, when the optimal reserve ratios of banks fall below the reserve requirements, they are unable to create enough loans to satisfy the investment demands of depositors. The market rate of interest will rise above the natural rate; the money supply will shrink. There will be a general downward pressure on prices. In the meantime, resources that would otherwise be reallocated to alternative uses will instead be unallocated, i.e. those resources will temporarily be invisible to the price system.
Ironically, this is one reason why people argue that we need a central bank. When the reserve requirements are binding, the Federal Reserve is the only institution capable of bringing the market and natural rate of interest into balance; though just because the Federal Reserve is the only bank capable of equilibrating the supply and demand in this case does not make them competent. I would certainly prefer to see the Federal Reserve (and its reserve requirements) abolished and true free banking in its place.
My signature is my own; it is my philosophy in a nutshell. The spirit of the critical attitude is in discriminating among alternatives. If a criticism is indiscriminate, then it isn’t really a criticism at all. You can use that to knock sense into relativists.
Invisible to the price system, but not invisible to fractional reserve bankers. You care to elaborate on how this occurs?
What exactly is distorted as a result of voluntary choices being made on the market?
What exactly is distorted as a result of voluntary choices being made on the market?
The money supply beyond capital capacity.
I think people have a hard time understanding what a 100% reserve ratio would mean. In that scenario, the bank would only make money by making you pay for you bills. In other words, you would pay a storage fee. Instead, you would have to look for time deposits or other kinds of investments to get a return for your money. The source of the distortion is the fraud of demand deposits because not all claims can be fulfilled at once. With a 100% reserve ratio requirement, demand deposits would be very rare since they would be a net loser over time. Investment would still occur, and we would have real growth because people would know the risks. Right now, people act as if there is no risk because of the fraud of fractional reserve banking.
How are you going to get banks to stick to 100% reserves though, without fiat? They don’t have to, the system can work fine (for a time) without it. And they did it before the FED.
Sue them for fraud if they don’t keep a 100% reserve ratio. That’s what it is, afterall.
How are you getting restaurants to stick to 100% poison-less food without fiat? They don’t have to. They can poison people fine (for a time) without it.
Working fine (for a time) is not working ‘fine’, is it? That’s why every single attempt at fractional reserve banking either (1) collapses or (2) turns into a banks-government cartel via central banks and legal tender laws. “Free” banking and “working fine”, my a**.
There has never been a 100% reserve bank. Fractional reserve banks have arisen in free markets before. That pretty much ends any debate about it.
Where? Don’t tell me the US before the Federal Reserve because those fractional reserve banks had the backing of the inflationary state banks.
I believe the Bank of Amsterdam was a 100% reserve bank for a time, as only one example.
There are now and there always have been plenty of outfits where customers could (1) store their money or (2) invest/lend their money without it being exposed to fractional reserve banking. They may not necessarily have called themselves “banks” in all instances. I hope your argument isn’t solely clinging on semantics. There are also plenty of historical examples where full-reserve banking has not only existed but had supported flourishing and prosperous economies (Byzantium, Bank of Amsterdam, Bank of France, etc.)
Theft, fraud, and murder have also arisen in free markets before. Does that also end the debate about how prevalent they would/should be going forward? Fractional banking has arisen but has, without exception, led to either (1) collapse or (2) cabal with the princes exemplified with central banks and legal tender laws, ultimately and inevitably leading to 100% fiat (0% reserve) systems we all “enjoy” today.
In Scotland. Lawrence White and George Selgin have written extensively about it. Rothbard tried to say that they weren’t really ‘free’ banks but White and Selgin pretty much destroyed that argument.
My mistake, I meant that full reserve banks have never arisen in free markets. You can store your money in a safety deposit box now if you want.
Non-sequitur.
Not in the Scottish free banking experience. It was actually incredibly stable which was in contrast to England which didn’t have free banking.
Free markets lead to big government because corporations ask for favors and handouts!
(See what I did there?)