Rothbardian Banking’s Nadir

Paul Krugman, without expecting a very serious answer, questions the Austrian School’s allegedly critical position on fractional reserve banking.

I don’t have much to say, and I don’t think there is much to say. I left a comment that sums it up: these Austrians are increasingly in the minority. The problem is that it certainly doesn’t seem as if this is true. The blogosphere is full of so-called “internet Austrians,” many of which affiliate themselves with Rothbardian banking theory. These tend to be very vocal, and so people basing their opinion on blogosphere reviews are getting distorted statistics. The fact is, there are increasingly few academic Austrians who still adhere to full reserve banking — usually, in some way linked to the Mises Institute, although even there the resistance to the Selgin/White model of (fractional reserve) banking is dissipating (I have in mind economists like Roger Garrison).

I usually avoid confrontation with full reservists on the topic. Those kind of discussions usually don’t go anywhere. But, from the point of view of needing to sell a different view of the broader Austrian tradition, maybe it’s time for Austrian (fractional reserve) free bankers to drown out the minority. All this being said, I don’t kid myself by thinking that Krugman might respect Austrians more if he were privy to alternative positions within the school.

Unrelated to the full reserve v. fractional reserve debate, I’d like to comment on money market funds. Krugman is essentially arguing that the modern financial system wouldn’t exist if we had a full reserve banking system. I don’t disagree, and I don’t see why it’s a problem. It would exist in a very different fashion even with fractional reserve free banking. Money market funds, for instance, were a product of the 1970s, when depositors were looking for alternatives to the tightly regulated demand deposit — remember, interest on demand deposits was (and still is) banned. Banking evolution is historically contingent.

69 thoughts on “Rothbardian Banking’s Nadir

  1. Leonardo IHC

    White here: http://www.coordinationproblem.org/2012/08/the-chicago-plan-revisited.html#comments “Pete, you call it “full-reserve banking.” But a money warehouse is not a bank — it makes no loans. And for a warehouse, the property held in the vault is not really a “reserve” but a bailment. The bailed property is either there or not; it isn’t a matter of degree, partial or full. To summarize: “full-reserve banking” is neither full, nor reserved, nor banking”. This is the best resume of the question. I think many self-declared economists have neither the slightest idea of what a bank is and does, nor the slightest idea that so called “bank deposit” is a completely different species of contract than mere deposit, it’s a particular species of lending instead! It’s upsetting that DeSoto, master degree in (what?) juridical subject, keeps being blind at this. Too many guys blur “names” with “concepts”. @Jonathan: Rothbardian banking is “no banking”, then.

    Reply
    1. Robert Roddis

      1, Because these are two completely distinct types of contractual arrangements, no one should have a problem with making sure that members of the public who engage in these arrangements as depositors and/or payees should be made fully aware of the differences in order for there to be a “meeting of the minds” in the formation of the contract.

      2. This dispute has the makings of a religious war.

      Reply
      1. Leonardo IHC

        1) Who’s got problems in informing people about the contracts? Anyway law (at least Civil Law – like in Italy) is explicit on the point: 5 different contracts explicitly regulated “regular deposit” “irregular deposit” “bank deposit” “current account” and “bank current account”, and you should know the normative content, not just the “title”, before saying that a certain contract is impossible or illegal. Maybe schools offer poor teaching on the point, which is undoubtly a problem to fix, but accademics (actual and wannabe-) should stop their crusade against FRB on moral (what moral?) and juridical (explicitly wrong) bases. An problem of people being correctly informed is not a theoretical matter for intellectual speculation.
        2) As rothbardians have said that, only for having disapproved their crusade against FRB, then I am a keynesian a shit and so on, I must say that it’s the full-reservist side who feels in a religious war. Sadly, the dispute is just the top of an iceberg: fighting over FRB means lack of consensus of what money and credit are, and where individual decision start and should be respected or protected. I have no interests in any religions.

        Reply
  2. Robert Roddis

    1. Jonathan: Why don’t you provide a list of the vast majority pro FRB Austrians and the tiny minority anti-FRB internet Austrians?

    2. I note that whenever I suggest that the potential fraud problem with FRB might be solved with full disclosure to payees on the face of the notes, the pro-FRB crowd suddenly becomes quite hysterical.

    http://factsandotherstubbornthings.blogspot.com/2012/07/bob-roddis-makes-bad-argument.html

    Further, I still think that there would be significant problems with FRB banking in a competitive currency environment, but we will not find that out until we get there. Meanwhile, I’m not going to lose sleep over the issue.

    3. Wasn’t the Great Depression caused by FRB in a non-competitive environment?

    Reply
    1. JCatalan

      A non-exhaustive list of economists who come to mind,

      Full Reservists: J. Salerno, W. Block, J.G. Hülsmann, J. Huerta de Soto, H.H. Hoppe, J. Cochran, …

      Fractional Reservists: G. Selgin, L. White, R. Garrison, (the late L. Sechrest), S. Horwitz, K. Dowd, L. Yeager, P. Salin, …

      Those are economists who actively participate in the debate. The list is pretty balanced, but note that most of the full reservists are related to the Mises Institute, while the list of fractional reservists includes names from a wide variety of academic institutions. And note, like I wrote in my post, full reservists tend to be very vocal, so a list of those involved in the debate doesn’t really represent the entire “population” in that outside the Mises Institute it’s the fractional reservists who are the most influential (in the academic setting).

      With regards to the Great Depression, and probably most (if not all) industrial fluctuations, it was caused by fiduciary overexpansion. Yes, a fractional reserve banking system, operating under a monopolized currency regime with a central bank, doesn’t have the market constraints — profit and loss — that would otherwise limit the issue of fiduciary media.

      Reply
      1. Danny Sanchez

        As for full reservists, don’t forget Jeffrey Herbener, Philip Bagus, and David Howden

        Both your original contention and Roddis’ question refer to “Austrian economists.” At least three in your fractional reservist list (Selgin, White, and Yeager) do not identify themselves as Austrians.

        Reply
          1. Danny Sanchez

            Ah upon further searching, I see you’re right about White. I was assuming he didn’t, because Selgin said, “Larry White is at most only one-third Austrian”.

            But I know for certain Yeager says he is at most a “fellow traveler” of the Austrian School. In July, I heard him say as much in person when he was at LvMI.

          2. George Selgin

            One reason why I have stopped calling myself an “Austrian” is that so many who do call themselves such seem to be constitutionally unable to read or quote things accurately. Instead of relying on your faulty memory, how about checking before you employ quotation marks? I referred to a paper as “one third Austrian” because it had three authors, of whom Larry was the only one who called himself that.

            This sort of sloppiness has played a big part in turning “Austrian economics” into a term of opprobrium for many people.

          3. Danny Sanchez

            I wasn’t just working from memory. I did check, copying it directly from your post, even. But I did read it too hastily, and misread the context, for which I apologize.

        1. JCatalan

          The Theory of Free Banking was published in 1988, two years prior to Selgin’s Praxeology and Understanding; he advocated free banking while he still associated himself with the Austrian School. His more recent disassociation is not because he’s lost sympathy, as he still publicly argues in favor of uniquely Austrian theories like the Mises–Hayek business cycle. He’s just not interested in labeling himself, where it might hurt the more important objective of defending free banking within the broader profession.

          As for Yeager, he’s less sympathetic towards Austrian ideas — he doesn’t accept the universal applicability of the Mises–Hayek theory and advocates monetary disequilibrium in its place, for instance. But, that he’s a “fellow traveler” is significant.

          Reply
      2. George Selgin

        It bears saying that of all monetary and banking experts who don’t call themselves either Austrians or fellow travelers hardly any (the exceptions are a handful of advocates of the Chicago plan) are on the 100 percent reserve side. That includes Laidler, Friedman, Goodhart, Leijonhufvud, Calomiris, Bordo, Schwartz, … well, every really great recent monetary and banking economist. The point is that you can list the one set, but not the other. It’s ridiculous to pretend that somehow the numbers are about easily matched. You have to live in a Mises Institute bubble to do so.

        And Jonathan, it was the Fed that supplied the fuel for the expansion of the late 20s. The rate of expansion was determined solely by it. Fractional reserves are a complete red herring here.

        Reply
        1. Danny Sanchez

          Literally nobody said anything about the numbers being matched with regard to monetary and banking economists in general.

          Reply
        2. JCatalan

          Was “endogenous money creation” not a significant driver of inter-war credit expansion? If not, it’s interesting that Hayek and Schumpeter emphasized fractional reserve banking in their early expositions of business cycle theory.

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      3. impraxical

        Lol, I just came from a link on a Peter Klein blogpost where these lists were referred to in a comment as a ‘survey’.

        I guess that’s the kind of intellectual integrity selgin wanted to leave the austrian school in order to be associated with.

        Reply
          1. impraxical

            Noone. Some idiot called it that in a comment on another site. That was the point of the joke.

    2. George Selgin

      “Wasn’t the Great Depression caused by FRB in a non-competitive environment?”

      Yes, in the same sense in which obesity is caused by food in a gluttonous environment.

      Reply
  3. Dan(DD5)

    So you consider Mises one of those increasingly in the minority apparently. Because the main issue at hand here is not whether you are against an explicit ban of FRB or whether you believe that the issue of loans beyond real savings -any amount of it – is a problem or not and is facilitated not by free market mechanisms but by government granted privileges and central banks, so that once you remove those interventions, banking would tend to be hard money banking systems.

    Who are all these academic Austrians who are “free bankers” of the Selgin/White type? Back up your assertion please.

    Reply
  4. Dan(DD5)

    Also….

    “These tend to be very vocal, and so people basing their opinion on blogosphere reviews are getting distorted statistics. The fact is, there are increasingly few academic Austrians who still adhere to full reserve banking — usually, in some way linked to the Mises Institute, although even there the resistance to the Selgin/White model of (fractional reserve) banking is dissipating (I have in mind economists like Roger Garrison).”

    This is totally baseless. prove your ‘distorted statistics” theory. Also, Garrison’s “dissipating resistance to the Selgin/White model”, as you put it, is quite a passive one I must say. There isn’t a single paper or work of his that explicitly supports it in any in-depth meaningful way or uses it in his macro analysis expositions. His “macro” based theories are quite neutral with respect to this problem. They assume “loanable funds” as equivalent to savings and do not explore the nature of these funds, and has not participated in the debate over these funds.

    Reply
    1. JCatalan

      I’ll respond to both comments here.

      Generally, yes, Mises’ views on banking are in the minority. But, Mises didn’t hold the same views as Rothbard, and so even a Rothbardian would have to agree that Mises was in the minority. Why? Because Mises’ banking theory wasn’t developed. But, even as late as Human Action there are clear distinctions between Rothbard and Mises on their views on the issuance of fiduciary media. Mises didn’t oppose fiduciary media, and he thought that this kind of money substitute plays an important role in increasing the efficiency of financial intermediation. He did write that a free banking regime would suppress the issue of unbacked banknotes, but the mechanism that accomplishes this restriction is very similar to that in the Selgin/White model: the return of excess notes for redemption.

      With regards to your second comment, see my response to Bob Roddis above. Maybe it would be more fruitful to provide some kind of argument against my argument, rather than heckling me to “prove it” (as if I were wrong on account of the fact that I can’t reproduce a list of all economists that adhere to each side). Neither do I think that R. Garrison’s adherence has been “passive.” I’ve heard that he and economists like Hülsmann have debated/disagreed at the Mises Institute. I also point you to his paper “Central Banking, Free Banking, and Financial Crises” (Review of Austrian Economics 9, 2 [1996], pp. 109–127), and his book Time and Money (London: Routledge, 2001). His position is not exactly ambiguous.

      Reply
      1. Dan(DD5)


        Mises didn’t oppose fiduciary media”

        Maybe “oppose” is too strong of a word here. But he did recommend as a “cure” a 100% hard money Gold standard as far back as in Money and Credit. He also made it clear that the issuing of fiduciary media is economically bad, period! No not money substitute per se, but fiduciary media. There is a difference.

        “but the mechanism that accomplishes this restriction is very similar to that in the Selgin/White model: the return of excess notes for redemption.”

        The more I read your posts, the more it becomes obvious that you are not very familiar with Rothbard’s works except for a few works on economic history. What is the “mechanism that accomplishes this restriction” in the Rothbard model? Have you read “The Mystery of Banking” yet?? So how do you know that Mises’s take on free banking isn’t actually closer to Rothbard’s “model”, as oppose to Selgin/White? He too concludes fiduciary media will be restricted in a FR free banking regime.

        Reply
        1. JCatalan

          Where Mises makes that recommendation is in part four, added in 1953, and deals with a “return to sound money” in countries where governments are likely to manipulate the supply of money — it’s designed to restrict this manipulation. It’s not an “ideal.” (Also, wrt to fiduciary media v. money substitute, re-read my comment (my emphasis): ” … he thought that this kind of money substitute…”) I don’t agree that Mises thought issuing fiduciary media “is economically bad.” That is, I don’t think he had such an absolute position. Of course, “excess” issue of fiduciary media (where Mises’ concept of “excess” is clearly different from the fractional reserve free bankers’, of course) is “bad,” but in Human Action Mises writes,

          Issuing money-certificates is a ruinous business if not connected with
          issuing fiduciary media.

          — p. 432.

          Reply
          1. Dan(DD5)

            Are you kidding? Mises is talking about “business” for bankers. Not that it’s economically bad. Read the thing in its context.

          2. JCatalan

            I’m not kidding you, and I am reading it in context. If issuing fiduciary media helps alleviate some of the costs associated with issuing money certificates, then fiduciary media might have some “good” economic purpose — that is, if money certificates have a “good” economic function (determined by the consumer, who chooses inside over outside money).

          3. Dan(DD5)

            might have, sure.. that’s the debate. But what did Mises say in that quote you provided. Nothing about that answer but about what’s good or bad for bankers. Good for bankers does not automatically mean good for economy. You can’t possibly be making that argument. Besides, he’s position is clear a few pages down, so what’s the point of this silly argument over what he thought.

          4. Dan(DD5)

            ….and can you be more clear then this just a few pages down:
            ” The notion of “normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle. Of course, if the additional amount issued is not large, neither are the inevitable effects of the expansion. ”

            Learn from Selgin. Abandon Mises if you think he’s wrong. Out of respect to Mises also. Don’t cling onto him like some other people , and I won’t mention who.

          5. JCatalan

            Who is “cling[ing] onto” Mises? I don’t advocate free banking on the basis of Mises; you just asked me to comment on whether I thought his views were diametrically opposed to Selgin’s and White’s, and I don’t think so.

            And, I also agree with Mises that increases in fiduciary media will cause relative price changes, but the question is whether this will lead to the business cycle — I don’t think so. Of course, I also think that changes in the demand for money during “stable” periods is unlikely to give a lot of room for fiduciary expansion, and when the demand for money tends to spike is also a time when bank balance sheets are usually subject to the shock of a sudden devaluation of a large stock of assets (impeding the issuing of further liabilities; e.g. banknotes). (I think the demand for money, in these cases, are a cushion against this devaluation, in that a rise in the demand for money might decrease the qty. of liabilities a bank has to deal with and therefore help avoid “excess” liquidation of assets. I don’t think very many other free bankers hold the same opinion.)

      1. Dan(DD5)

        I find it very interesting though, that you had to personally remind him in an Austrian seminar at FEE 2 years ago that it’s OK to issue fiduciary media as a response to an “increase in demand”, after he said, as a response to a question, that basically any amount is bad (and he quoted Hayek to support his answer).

        Reply
  5. RichardJ83

    Query for you Jonathan as you support Austrian business cycle theory and fractional reserve banking but not monetary equilibrium theory: how does an increase in bank created money i.e. money not backed by increased savings, not artificially lower interest rates and trigger the business cycle?

    Reply
    1. JCatalan

      There’s two ways that the supply of fiduciary media will increase in the model,

      1. A lowering demand for outside money (call it gold) and an increased demand for inside money for use in exchange. As less people are actually redeeming their gold deposits, because they rather carry inside money (banknotes), banks can get rid of some of that gold reserve — this might be partially offset by whatever gold is deposited withing clearinghouses (although, in a world with low financial insecurity they might not see a need for high gold reserves). But, this isn’t an increase in the supply of money in circulation, meaning there is no “distortion” of prices (which is what causes the business cycle).

      2. An increased demand to hold money. This is akin to sacrificing present consumption in favor of consumption at some point in the indefinite future. So, at the extreme, fractional reserve free banking actually allows for a more efficient use of savings. I don’t think this second mechanism is all that important, because significant fluctuations in the demand for money aren’t random (they’re usually a response to an industrial fluctuation). So, I don’t really think there would be an opportunity to significantly increase fiduciary media in this manner.

      Reply
      1. Dan(DD5)


        An increased demand to hold money. This is akin to sacrificing present consumption in favor of consumption at some point in the indefinite future”

        Fluctuations in demand for money is a function of uncertainty. Not time preference. Absent uncertainty, no medium of exchange is needed. In the ERE, there is no need for money. The above statement is simply false then. It cannot be reconciled with Austrian/Misesian monetary theory. Do you reject that too now? Demand for money can rise when time preference is also on the rise. In fact, that’s the likely outcome in a time of great uncertainty. People hoard cash and become more present oriented, for tomorrow it may be the end of the world. So banks are not intermediating anything when issuing fiduciary media in response to a rise in demand for money.

        Reply
        1. JCatalan

          Changes in the demand for money can also occur if someone is purposefully saving — it could be a question of saving in the form of a more liquid asset, rather than a relatively illiquid one. Liquidity might be an issue when you’re not sure when in the future you might need/want to consume. But, it’s all facets of the same phenomenon. Holding money to consume tomorrow is no less future consumption than putting money in a time deposit to consume in the more distant future. (It also could be that some people aren’t interested in less liquid forms of saving — all my money is a demand deposit, even though it may sit there for months, or even years.)

          Reply
          1. Dan(DD5)

            You answer is very ambiguous. Is it possible or not for people to increase their time preference by means of increasing their cash holdings? If yes, then you cannot say that a rise in demand for money is a rise in savings that banks can then loan out and your assertion that “this is akin to sacrificing present consumption in favor of future…..” is wrong.

            Also, if you believe that this is really “akin to sacrificing present…..” then the entire chapter in HA on indirect exchange is basically incorrect.

          2. JCatalan

            So you’re saying that someone who rather hold on to a dollar bill, rather than go out and spend it, is not withholding from present consumption? If people are increasing their cash balances, then they aren’t spending these cash balances in the present. The rate of maturity is irrelevant to deciding whether something is being presently consumed or not.

          3. Dan(DD5)

            I am saying that demand for money is time neutral. It’s one of the most astonishing conclusions of Austrian monetary theory. (Oh sorry, in light of recent discussions, I should say Misesian monetary theory maybe) What you said above – “akin to sacrificing present…..” is that it essentially isn’t time neutral. Now you can argue that it isn’t time neutral, but then you are completely misunderstanding Mises monetary theory if you claim to still adhere to it, or you can argue that it is indeed time neutral, and hopefully realize that your statement cannot be reconciled with this fact.

      2. Matthew Tanous

        You are ignoring what has been common to the Austrian tradition for a century, dating back to Mises work on money. Claims to money circulate as money. Increasing the number of claims to money – but not the money itself – will cause the business cycle and higher prices, and will need to be liquidated in the bust. So you are completely wrong.

        What FRB does is create an apparent rise in the supply of money. As banknotes circulate as claims to money, there is no problem until the demand for gold over banknotes rises and the gold just doesn’t exist. Then you have a collapse. The problem that you are ignoring is that Rothbard was right – demand deposits are not loans, but a warehousing function. Only non-demand savings can be considered a loan to the bank.

        Reply
        1. JCatalan

          In the Selgin/White model, fiduciary media is replacing other fiduciary media in circulation. In other words, as the demand for money rises, or a certain quantity of fiduciary media is no longer circulating, new fiduciary media is lent out to circulate in its place. This isn’t inflationary, since the quantity of money circulating remains exactly the same. Alternatively, what used to be money certificate will become fiduciary media as the quantity of outside money in reserve falls, but this isn’t inflationary either, as the quantity of money + money substitute in circulation remains the same.

          Reply
    2. Leonardo IHC

      bank credit is not created out of thin air: deposits are actually lending from so called depositors (savers) to the bank; FRB means that the bank is allowed to re-lend these sums only in part. It’s not “new” money but just circulation (or velocity) of existing base money. As more credit is available, interests lower, which incentivize investments and lower savings. The problem is that the Central Bank can break the equilibrium creating more money thus artificially increasing deposits, which – while prices have not included the occurred change of numeraire – become more lending unrepresentative of more real savings.
      It’s not bank credit (FRB) the problem, but the source of base money. Banks are “intermediaries”, finance “transfers”, does not “create”.
      Here Bagus has been called a full-reservist. Ok, He wrote that a 100% reserve does not suffices to avoid cycles, as State money distortion can go on the same. It’s a hint that FRB is not the core of the cycle.

      Reply
      1. Matthew Tanous

        “FRB means that the bank is allowed to re-lend these sums only in part” Uh, no. FRB means that they re-lend these sums *while someone else still has a claim on it*.

        Hence, if I deposit $100, and they have a 50% reserve rate, there will be up to $150 claimed. That $50 likely would be deposited again elsewhere (why else take out a loan?) and the process repeats, with now $175 in claims supported by only $100. And so forth, with ever diminishing increases in the money supply. Eventually, such a process can only result in pain, due to the fraudulent nature of instant claims to money that DOESN’T EXIST.

        “Here Bagus has been called a full-reservist. Ok, He wrote that a 100% reserve does not suffices to avoid cycles, as State money distortion can go on the same. It’s a hint that FRB is not the core of the cycle.”

        100% reserve cancels out the credit expansion of the banks, but the central bank can still print money at will. What Bagus was saying is that you need a 100% reserve to stop the bank’s fraudulent expansion of the money supply (which is one layer of the current pyramiding scheme) and a gold/silver/etc. commodity money to prevent the creation of new money at will by the State (the lower layer of the current problem).

        Expansion of the money supply is the problem. Right now, the Fed can change the monetary base by printing notes or creating bank reserves. Those reserves are pyramided by the fractional reserve banks. You need a commodity standard to stop the former, and a 100% reserve requirement to stop the latter.

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        1. Leonardo IHC

          I lend 100 to you, you have 100 of money and 100 of debt wit hme; you lend 80 to Jonathan, you acquire 80 of credit with Jonathan. Ever heard of intermediation? Where are 80 from? are part of the credit received from me. I got no right on your sums, I got a credit on you. You keep on being fooled by the possible immediate redemption of the credit so you blur credit and money.

          Reply
          1. JCatalan

            Matthew might say that since the 80 were lent from a demand deposit, the original depositor still lays claim to the full 100. So, while 80 are lent to me and spent by me, the original depositor might withdraw 80 at any point and use it as well. So, now we have 160 in circulation. But, of course, in a free banking system this would require the bank to reduce outstanding loans and contract the money supply, because the volume of returning notes increases.

          2. Leonardo IHC

            Well, also in “our” banking system, if depositors withdraw more than the reserve the bank will have to liquidate assets (or withdraw onw lending). the distorsion is the possibility to get further “loans” (these are actually out of thin air) from the central bank to compensate the first outflow.
            The problem is that I think my lending is money, so I act AS IF, but as long as I don’t withdraw it, my lending acts like mere lending. Anyway, economically, there is no duplications: a credit right is not property right on certain money, and so called FRB (which is actually lending lent resources i.e. intermediation) means “circulation”. Circulation is also when I buy something, and the seller uses the received money to buy something else; here you exchange an object, in a bank you exchange time.
            Summing up money, credit, and further credit is summing apples oranges and pears then pretending it is a multiplication of bananas.

    1. JCatalan

      This post isn’t arguing that most academic Austrians support fractional reserve banking, therefore this is the more correct position. Rather, the point is that if most academic Austrians support fractional reserve banking, then maybe the Austrian School shouldn’t always be associated with anti-fractional reserve banking.

      Reply
  6. Matthew Tanous

    The pro-FRB Austrians are in a bit of a pickle, I would think. Given that pre-Fed banking panics were precipitated by fractional reserve credit expansion, as the business cycle they profess is correct shows, I don’t see how they can support it.

    And that is besides the fraudulent aspect of giving multiple people on-demand access to the same deposits at the same time. (The interest on deposit argument is fallacious, as that can only be possible due to the fractional reserve system, which – if it is fraudulent, and I contend it is – is similar to allowing pyramid scheme fraud on the basis that you get a return on investment while it is still working. Without deposit insurance, I’d bet that interest on quasi-demand accounts – i.e. “savings” – would also disappear, or the quasi-demand aspect would.)

    Reply
    1. JCatalan

      I invite you to read my presentation “Regulating the Radically Unknown;” it goes a bit into banking history. You can follow the bibliography, as well. Just because the Fed was chartered in 1913 doesn’t mean that prior to it we had a free banking system.

      As for the “fraud” argument, I actually think it’s the weakest of them all (versus the instability argument). A depositor and a bank sign a contract, where the terms should be explicit. If fractional reserve banking is still fraud, then I’m afraid that the bulk of business transactions constitutes “fraud” due to some information asymmetry.

      Reply
    2. gcallah

      “The pro-FRB Austrians are in a bit of a pickle, I would think. Given
      that pre-Fed banking panics were precipitated by fractional reserve
      credit expansion, as the business cycle they profess is correct shows, I
      don’t see how they can support it.”

      So, Matthew, you feel it is ok to restrict voluntary transactions if they are not in the public interest?

      Reply
  7. Pete Walker

    47 and counting comments mostly pro or con FRB. A third choice (I may have missed if someone already mentioned it) could be for people in a free and open market to choose from a variety of money/currency and from a variety of warehousing/banking models. Such models could include ranging from the warehouse model of savings at a lower risk (assuming low or no inflation) or an FRB model of varying reserve ratios with varying levels of risk.

    I say “could” because governments in collusion with other special interests rig all the above in their favor. To reverse the rigging begins with people in general becoming economically literate enough to understand it. For instance I never heard of FRB until I was in my fifties, and this is typical of most “educated” people I know.

    Reply
    1. JCatalan

      Yea, I think your’s is the sensible option that most people choose if they don’t want to get into the theory. But, I think that if you’re interested in the theory of banking, then there’s little uncertainty regarding what type of banking would prevail in an advanced industrial society.

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    2. JosephFetz

      This is actually very close to what I have said in the past. In fact, I am seeing that many of the more thoughtful full-reservists have taken the position that you speak of. In other words, most of us have read both sides of the argument and have taken our stance in the theoretical/philosophical realm, but I think that the broader agreement lies in the fact that we all would much rather have the market determine the practical reality.

      Just to be clear, I am not an academic or theorist, I would more accurately fit the “internet Austrian” description.

      Reply
      1. Pete Walker

        Quoting a previous FB post:

        “I don’t consider myself a scholar in any one subject area, but literate in all that I conclude pertain to me first as an individual and second as a social being. By “literate” I mean able to use something as an overall life maintenance (anti-backsliding) and improvement tool. For instance the way I was raised in 1950s-60s USA wasn’t to determine truth for myself, but instead to memorize doctrine and ask “authorities” if unsure of anything. I rebelled and replaced that with philosophy.

        I then concluded history/current events are to philosophy what data is to scientific experiments. That in turn led me to conclude that most non-faddish fields of study are personally relevant to the extent that I understand in a general way what the specialists are doing and how it affects me. I may not be interested in war, but war is interested in me.

        I agree with Stefan Molyneux that freedom consists first of freedom from illusion and second of freedom from violence; that only the first can lead to the second. Therefore being a non-sophist scholar is a must for some, but being literate to the point of identifying what’s win-win, win-lose, and lose-lose is a must for us all.”

        Reply
    3. gcallah

      “A third choice (I may have missed if someone already mentioned it) could
      be for people in a free and open market to choose from a variety of
      money/currency and from a variety of warehousing/banking models.”

      That is merely the FRB position! No FRB-er wants to FORCE FRB on anyone.

      Reply
    1. Jonathan Finegold Post author

      I commented on Jaitly’s remarks on this blog, and I had a really brief discussion with him that really didn’t go anywhere. I really don’t think Jaitly has a handle on Mises’ views, somehow coming to the conclusion that praxeology contradicts subjectivity (and suggesting that we return to our roots of Menger and Böhm-Bawerk, even though Menger heavily criticized the latter for being, in a sense, too subjective). As far as interest theory goes, yes that’s correct. The time preference theory of interest is really based on Böhm-Bawerk’s work, but Mises rejected the “objective” rationale behind the theory (which some say is erroneous). Other Austrians seem to accept the basic loanable funds theory of interest, but I don’t think this really captures the pure time preference theory of interest as developed by Fetter and Mises.

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