A very old and well known story is told in Genesis 11. It is the story of the curse of Babel:
Now the whole world had one language and a common speech. As people moved eastward, they found a plain in Shinar and settled there.
They said to each other, “Come, let’s make bricks and bake them thoroughly.” They used brick instead of stone, and tar for mortar. Then they said, “Come, let us build ourselves a city, with a tower that reaches to the heavens, so that we may make a name for ourselves; otherwise we will be scattered over the face of the whole earth.”
But the LORD came down to see the city and the tower the people were building. The LORD said, “If as one people speaking the same language they have begun to do this, then nothing they plan to do will be impossible for them. Come, let us go down and confuse their language so they will not understand each other.”
So the LORD scattered them from there over all the earth, and they stopped building the city. That is why it was called Babel—because there the LORD confused the language of the whole world. From there the LORD scattered them over the face of the whole earth.
I retell this tale not for the sake of the theology but for the sake of our present debates. In what follows, the names have been omitted in the hope that I may be excused any hint of misrepresentation…
When I first approached a prominent worldwide leader of the Austrian School, in frustration at the pitiful state of economic debate, to ask who were the UK’s best Austrians, with a view to starting a UK-based Austrian-School think tank, things seemed ever so easy. I had mostly read Mises and a touch of Rothbard. I understood the Austrian school and the monetary theory of the trade cycle but I was not broadly read into the scholarly debate over money.
And then I discovered the curse of Babel amongst the monetary scholars of the free-market.
One eminent free-market British academic believes that central banking, fiat money and fractional reserve deposit taking are institutions which have evolved naturally in society and which should be preserved. He believes the Bank of England should be privatised.
Most Monetarists seem to think central banking and fiat money are just fine, together with the Keynesians, some of whom at least think they are free market, but some advocate various forms of full-reserve banking.
Most, perhaps all, Austrians think the central banks are a plain instrument of statism which should be abolished, together with deposit insurance, legal tender laws and various other privileges. They reject fiat money outright, more often than not, as a creature of interventionism and a tool of the enemies of liberty.
But one faction believes that fractional reserve deposit taking is a breach of sound property rights — a thoroughly libertarian concept — and that it emerged out of fraud to be legitimised by the state.
The other faction pay little heed to the theory of property rights in demand deposits, emphasising freedom of contract. They believe fractional reserve deposit taking is a natural and honest phenomenon which enjoys the consent of depositors. They argue that full-reserve deposit taking is only ever a product of the state and deride the full-reservers willingness to restrict freedom.
Amongst all this, the protagonists accuse one another variously of economic or legal ignorance or a misinterpretation of history. All sides have their scholars and their literature. Both factions claim the term “free banking” as a rejection of central banking. Sometimes they claim the support of the same scholars…
It seems once we go beyond money as the means of exchange, universal agreement stops. Truly, when it comes to the institutional arrangements for money, we are under the curse of Babel.
It is a pity then that money is dying.
Right across the western world and perhaps shortly in China, we see state-supplied money running out of control, with all the distortions and maladjustments that implies, across sectors, regions and time. It seems the state’s response to every setback is more borrowing and more debasement. Unable to sensibly measure the money supply and unsure whether circumstances are inflationary or deflationary, the authorities wrestle to prop up a system damned by its own inadvertent design, a design which emerged out of the failure of Bretton Woods, itself a system condemned to a youthful death.
Five years ago, I would have wondered how the monetary authorities of the Weimar Republic could be so stupid…
At The Cobden Centre, we are agreed that honest money is a product of the market subject to the laws of property and contract, not the will of authority. With Richard Cobden, we agree that the very terms of regulating and managing the currency are an absurdity: the currency should regulate itself. Unfortunately and despite endless study, we seem to be able to agree neither what the proper institutions of such a system would be nor how to get there.
We have previously published an admittedly incomplete list of ten plans for reform. Since I agree with Sir Mervyn King (PDF) in that “of all the many ways of organising banking, the worst is the one we have today”, I could happily accept most of them as a step forward. Perhaps Bagus’ “button-pushing” withdrawal of the state would have disruptive consequences beyond our imagination but it seems mere perseverance with our present system is little more predictable, except in as much as it shall fail.
The original curse of Babel was cast, it seems, to prevent a people speaking as one: for speaking as one, nothing they planned to do would be impossible for them. Perhaps we shall not aspire so high, but we must change if we are to rise above the level of The People’s Front of Judea and win a battle which, it seems, must be won in our lifetimes.
I think we are in danger of missing the wood for the trees here. As I understand Austrian economics, the whole point of the school is to allow the free market to function properly. This is achieved through a hands off approach to the monetary system.
If you keep one thing constant, then other things will move and vice versa. The problem with monetary tinkering, e.g. with money printing and interest rate policy is that it interferes with the natural market processes of price discovery, that is price discovery of goods and services as well as the price of money. By providing stable money this price discovery process works unhindered.
Stable money is easy to obtain: 100 per cent reserve, gold backed money completely divorced from the state. It really is this simple. The difficult bit is to prevent banks and governments from cheating, which historically they have always done.
http://www.zerohedge.com/news/sun-chairman-whats-future-prologue-and-why-second-french-revolution-coming-america
Why can’t both groups of Austrians are right? The national central bank must issue 100% asset backed money, but why can’t it be up to the consumer in a free market environment to decide how much of a reserve and in what form they require their own depositing bank to hold? It may be that some people want 100% – fine, they must pay for that through charges for securing their money or low interest. Others may be happy with less in nominal terms, say 40%, or 70%, or a portfolio of assets, or 5 tons of gold, in exchange for higher interest or reduced charges. At the moment as a consumer I have no choice in this at all. Ideally we could do away with central banks completely, and have depositing banks issuing their own currency, but for the practical present that seems impossible. The problem in the past was clarity in the books – how do I know if my bank goes below 70% reserve because they have (as we see these days) used £100k as a basis to lend £100m? But we no longer live in the 19th C wild west – such data can be disclosed on a very regular basis to the consumer and the regulator, plus any default-risk insured against. Excess followed by chronic shortage of liquidity is the problem the world economy has struggled with for a century, and liquidity comes from lending banks as well as central bank debauches.
Steve writes: “The other faction pay little heed to the theory of property rights in demand deposits, emphasising freedom of contract.” I don’t think this is correct. We don’t overlook the question of property rights. Rather, our claim is that gold (or other basic money) “deposited” with a bankers generally becomes the banker’s property.
Simon Bennett writes: “Stable money is easy to obtain: 100 per cent reserve, gold backed money completely divorced from the state. It really is this simple.” Yes, it is always easy to cater to one particular human desire if one overlooks others. In this case, the solution involved denying banks the right to intermediate savings that come to them in the form of demandable deposits. Putting aside the matter of what ought to be legal (though I don’t for a moment concede that there’s anything illegal about fractional reserve banking as traditionally practiced), this would, if Adam Smith, Rondo Cameron, and other students of economic history are correct, have meant depriving the world of a very crucial source of capital and prosperity.
Croydonius writes: “Why can’t it be up to the consumer in a free market environment to decide how much of a reserve and in what form they require their own depositing bank to hold?” It makes absolutely no sense for depositors to be able to specify a reserve ratio–no more sense than it would to have them determine which loans a bank ought to make. These are things best left to bankers’ discretion. If on the other hand someone prefers not to deal with fractional reserve banks, that option has always existed, notwithstanding silly Rothbardian suggestions to the contrary. Look around, look back: you will find every sort of law dictating minimum reserve or capital requirements banks must satisfy, and not a single instance of a law dictating any maximum requirement.
Nor has the language of fractionally backed banknotes been misleading. Examine any property title and you will see that there is a clear difference between the language of such a title, usually containing terms like “This certifies that so and so is the rightful owner of such and such,” and a banknote’s “The X Bank promises to pay Y or bearer Z dollars.”
What, pray tell, is insufficiently clear about this?
The Cobden Centre lately has been pleading for an accord between the free bankers and the critics of 100-percent reserve banking. You might as well ask the Royal Geographic Society to meet the flat-earthers half-way.
Hello George
What solution do you advocate and why?
Thanks
Simon
“Simon Bennett writes: “Stable money is easy to obtain: 100 per cent reserve, gold backed money completely divorced from the state. It really is this simple.” Yes, it is always easy to cater to one particular human desire if one overlooks others. In this case, the solution involved denying banks the right to intermediate savings that come to them in the form of demandable deposits.”
I do not believe that banks have any right whatsoever to intermediate savings from demand deposits. Why should they have any right, it is not their money (although I know in the present corrupt system it is)? In a 100 per cent reserve system the depositors themselves decide if and when and for how long they will lend THEIR money.
Afternoon George,
“if Adam Smith, Rondo Cameron, and other students of economic history are correct, have meant depriving the world of a very crucial source of capital and prosperity.”
Call me old fashioned if you like , but the only way to prosperity is 1, the entrepreneur identifies an opportunity to provide goods and services to his fellow man that either were not provided before or were provided in ways that he thinks he can better, 2, from his savings or that of others, he then invests, 3, by investing he makes his new mixture of the factors of production more capitalistic , more intense and more productive, 4, this happens over time. More goods and services for less use of scarce resource = more prosperity. No messing with the money unit can every produce more of this.
Steve, GS and the FRFB School hold that the law is correct in its enforcement and respect of private property rights (there are de jure and de facto correct in this) i.e. you deposit , you do not own what you deposit but you own some form of bank liability. I hold that this is counter to what the common many actually thinks has happened and thus the very basic “meeting of the minds” test to get you into the potential of having an enforceable contract is never even met.
These means that they are just as equal defenders of private property rights as you and I, however as we know from our survey and from the ignorance you experienced building software platforms for bankers and I in business dealing with these guys , there is at best ignorance to what is or is not happening. Thus the Carswell Bill allowing full and proper disclosure for safe keeping and for on lending would be a good start. Lending money to a bank and allow them to issue bank liabilities that you could trade as money, if all parties consent to it, should also be allowed in my book , so long as no harm can be done to others , that is other than the consenting parties. Thus, I actually believe we can mount Babel and over come any difference.
So George, calm down, we do not have flat – earth people.
George,
I don’t think reconciliation is out of the question over here (the Mises institute is a different matter).
As I understand Toby’s current proposal it effectively doesn’t ban fractional reserve banking. A bank could offer an account with a declared maturity, but pay before that. As far as I can see that’s like an option clause. The proposal considers it a “high risk” option, but still legal.
If a plan like it were implemented we’d see what options people take up.
I don’t think that issue of forcing banks to tell their customers that their accounts are fractional reserve is a big one. I want to see banks clearly explain this myself.
And Current=Rob Thorpe, I’m not intending to confuse anyone. I was posting this from a computer I haven’t used for this site in a while.
Current, you make yourself look silly when you say the Mises Institute. I meet all types of people who would support FRFB there. I used to see Leland Yeager every year and Pascal Salin, Larry Sechrest (George S even shows up from time to time himself ) and many others. The Institute has no corporate line on this. Yes there are more 100% Reserve supporters there, funnily enough as this is what Mises himself advocated in Theory of Money and Credit and other works!
“Why should they have any right, it is not their money (although I know in the present corrupt system it is)?”
No Sir. It has always been their money. This is what the 100 percenters refuse to understand. Since the beginnings of banking in England, and even well before, the law of the land was that when loose coin where surrendered to a banker (or money changer or whatever), the banker became their true owner, and as such could do whatever he wished with them. The bankers’ promise to repay was regarded then as today as a debt obligation, and nothing more. That it was sometimes a promise to pay on demand made no difference.
If someone wanted to have coin warehoused, doing so was a simple matter of surrendering coin in a sealed bag or other container; in that case the coins remained the “depositors” property, and the banker had no right to employ them. Today that same option can be exercised by anyone who acquires a safety deposit box. What? You object that one can’t transfer money in such a box using a check of debit card? Well, too bad: a bank can’t offer such transfer services, which require parting with originally deposited “property” forever, unless the property is theirs rather than the depositors.
I am no fan of the “present corrupt system” of banking; indeed, so far as I’m concerned, so long as bankers take advantage of government guarantees you may squeeze them with regulations until the pips squeak. But I also believe that no less strongly that banks that forego guarantees should be unmolested by regulators, including regulators who would impose any reserve requirements on them (and their clients) whatsoever. In any event the fact that the state has corrupted banking is no excuse for proffering an entirely fictitious version of the law of bank deposits and notes.
George
We appear to be arguing at cross purposes here. I totally agree with you that we have never had a system in which the depositor retained title to his money, this is the point I am making. However, just because we have never had it does not, by virtue of this fact, make it any the less desirable or any more difficult to implement.
I am still struggling to understand what your point is though, unless it is simply to point out what you see as fallacies in other people’s arguments. I am interested in what you think would work and why.
I have just reread my post and I now see why you have written what you have written. I use the terminology “I do not believe the banks have any right…” from a moral and a philosophical perspective and not a legal one. I regard the current system as largely corrupt and beneath contempt, and therefore I do not think of rights in their legalistic sense.
Afternoon Simon,
If you invest in a pension in this country, I can assure you, if the fund has a cash balance not invested, it will more than likely hold on a custody account . Its investments would also be held in custody.
When Bearings went bust did you hear any of the clients saying “wo is me, I have lost everything,”….? I think not as all sensible investors would have custody arrangements. In Lehman Bros with all the zillions of losses there, was this with investors and people they were Prime Broker for or the shareholders on the whole? I think you will find they are shareholders on the whole. I can’t be sure re the latter as the unwinding is still taking place, but I think I am right.
So we do have a great and long history in this country of people being able to deposit and own their own money that is still very much alive today. This sits in contrast to the more retail only banking where you are a unsecured creditor what ever the circumstances , unless you do as GS says and put your savings in a safe deposit box and totally remove your self from the ability to transact.
I would also suggest that this custody side may well be even bigger than the retail FR side of banking. Again this is a educated guess.
Hello Toby
Thanks for taking the time to reply to me. My interest isn’t so much about my money and assets as what I believe is a right and proper system for everyone in the world, so that we can prosper together rather than languish in debt and servitude. I think the current monetary system is a shambles and a disgrace, and I also think that the core of Austrian economic theory is the best intellectual framework for a replacement that I have as yet come across.
My greatest concern is this “tower of Babel” within the Austrian school that Steven Baker talks about in his article. If Austrians cannot even agree on a unified approach to the monetary system, who on earth on the outside is going to take the blindest bit of notice of anything that any of its proponents have to say?
Anyway, keep up the good work. I look at your website and the von Mises website everyday, and I am currently downloading loads of books from the Mises website to educate myself further in Austrian economics.
Sooner or later the whole sorry mess is going to collapse around the ears of our so called leaders, and I am hoping that Austrian economics can provide the framework for a new “post-Keynesian” world economic system to replace it. However, unless the Austrian school can get its act together and speak with one voice it will never be taken seriously by the mainstream.
George , I seem to remember reading the ratio decidendi of the case Carr v Carr 1811 and a sealed bag of coins was viewed as a bank debt obligation. Not by my books now, I can’t be sure that was the case , but that does ring a bell. From my perspective, I think this was when the law lost is anchor and confusion has remained since.
“You object that one can’t transfer money in such a box using a check of debit card? Well, too bad: a bank can’t offer such transfer services, which require parting with originally deposited “property” forever, unless the property is theirs rather than the depositors.”
“Well, too bad” Not a helpful comment , I sense frustration.
I have long thought that if I choose not to become a unsecured creditor to a bank by not lending it money but by placing a fiduciary deposit , I should not even be on the banks balance sheet. The bank should , as custody banks do, charge a fee for plugging me into the international payments system, I am never on their balance sheet, but it does not need to own my property to facilitate a pass though of money from A to B. A stock broker who plugs me into the international buying and selling platforms for shares does not have to take ownership of my money when I buy X shares, he just is allowed to deduct commission as the transaction passes through his intermediation services. Banks have this curious arrangement where they take title even if you do not want that to happen. Clarity in the law is the way forward to more honest and stable banking . I know of no reasonable person who could argue against this.
Steve. I think The Life of Brian reference just perfect.
““Well, too bad” Not a helpful comment , I sense frustration.” No no, Toby: just suggesting that one must understand that in insisting on 100% reserves one also rules out provision of certain payments services that depend on bankers’ taking ownership of deposited funds.
Concerning Carr v. Carr: As I recall the case didn’t involved a sealed bag of money, so the judgment (whatever it was) was based on the rule that the “deposits” in question were not the depositors property but a debt owed to the depositor by the bank.
Morning George,
I have looked back at the reasoning and yes, no sealed bag, just ref by the Master of the Rolls that if it was a sealed bag it would not be a debt. I also remember I did write it up here https://www.cobdencentre.org/2010/09/the-legal-relationship-between-the-banker-and-his-customer/
100% reserve does not rule out access to payment services in custody banks , only in full on FR banks. I hold that even a bank with FR as its modus operandi can offer custody and transaction services . HSBC provides both services . In one you do not sit on the balance sheet, in the other you do. In both cases you are charged varying degrees for this set of services. I would suggest that here lies the seed of potential reform , so that the likes of the Simon Bennet’s of the world can see the Austrian School come out and provide pro active policy suggestions. You can have a custody banking and FR banking sitting side by side with full disclosure. Absent government involvement and I suspect all parties in this conversation will be happy .
Morning Toby
It is quite a good discussion we have got going here!
Although it is difficult to say much of substance in a forum such as this, I think it is worth a try. My point is not about having full reserve and FR banking sitting side by side, but the complete abolition of all forms of inflationary policy which includes FR banking.
As I see it, the whole point of Austrian economics is about sound and stable money! FR banking is just another part of the many headed hydra that injects more and more money into the system backstopped by the central planners in the central banks. The whole system distorts and ultimately destroys the pricing mechanism and then the economy, as we are witnessing in the world today.
The whole neo-Keynesian idea of central planning of money, control of interest rates, and allowing banks to issue loans out of thin air is the problem. We need to convey this message to the world with one voice. This is my point. If other Austrians believe I am wrong on this point, I would like to hear why I am wrong and what alternative approach they would suggest and why.
I am not interested in discussing the legal niceties of suggestions that fit with the current system, as I believe in the next few years it will fail completely. We Austrians need to be ready with a decent replacement economic system when it does. Bickering about minor changes to the current system is, in my view, counter-productive.
Toby
Just a short PS to add to my comment. I have just read Detlev Schlicter’s excellent article on this site:
https://www.cobdencentre.org/2011/08/financial-markets-still-dont-get-it/
Detlev is right. The central bankers, the money printers and the inflationists have failed. It is just a matter of time before everyone else realises it. When they do, there will be what von Mises’ describes as a crack up boom, as everyone runs for the exits out of “paper” assets into something which actually has value. It is for that time that we Austrians should prepare.
Evening Simon,
The Austrian FRFB people would argue that their system is not inflationary. Remember, if you take the state away and a bank issues its own demand liabilities in the knowledge that it can’t pay them all at once, then its customers can demand (and have historically done so) redemption and enforce discipline i.e. make sure it is not inflationary via market control. This is the core point , although there are many others that our Austrian colleagues who support the FRFB (no state) that they would say makes this better than a 100% Reserve Free Banking system. Their theory shows no inflation. They are not inflationists. I think there are some problems with this Theory of Free Banking which GS and others are aware of that make it unstable, but better than we have today. I think it can be made more robust with a few tweaks here and a few tweaks there. This could make both visions of free banking actually compatible .
Evening Toby
Yes I am aware of this faction of Austrian thought and I think it certainly has merit. The reason I am opposed to it personally is that banks have always been dishonest and I believe they will always be dishonest. I think the temptation to inflate is just too great and the potential rewards too huge if they do.
I suppose strictly speaking I am not a fully blown libertarian. I think the state and the banks should be set against one another as a counterbalance to each others obvious power. The problem we have today is that they are in bed with one another, which is why the entire global economy is screwed!
However, I certainly think that any system of banking which is free, i.e. not tied to the state, is vastly superior to the current system. However, it is always in politicians interests as well as bankers interests to inflate which is why I think neither of them can be trusted.
So, in summary, I think FRFB is great in theory, but I am sure it will degenerate into an inflationary cartel before you can say Jack Robinson.
Oh and I forgot to mention. If Austrian theory is correct, I can’t see the point of any form of fractional reserve banking.
The whole point of sound money is to allow the market to set prices and interest rates. If people want to hoard fine, then prices just adjust downwards. If more people want to invest than borrow then interest rates go lower. If more people want to borrow then interest rates rise. This is the beauty of Austrian economics, it provides an automatic system which adjusts continuously to market participants desires and needs, not what central planners want. In this way the economy flourishes because it naturally adjusts to the needs of everyone working together. This is real freedom.
I just found this video, I think it just about says it all:
http://www.youtube.com/watch?v=-HaqwFJj4ZY&feature=player_embedded#at=241
I agree. It is just we have this branch of the wider School that have used passages in Mises and in Hayek to develop out some of the implications of their own reasonings to read something different to their own conclusions. Despite their conclusions in the case of Mises being only 100% Reserve and Hayek moving between a whole variety of suggestions from hard money 100% reserves to mixed basket backed commodity money and various things in-between, using some of their methodology , you can come to different conclusions. This money dis-equilibruim theory and money equilibrium theory has supporters based around a handful of USA universities . It is better for all to be focusing our fire power at the State with a common solution, a political solution which is not always theoretically “pure,” than getting zero done. Then one can focus on fine tuning. I would like to have these people along for the ride rather than shooting from the side lines at us! There world view is essentially the same as ours.
Morning Simon,
That cartel may well be the case, this is what Bagus and Howden argue , but for a cartel to stay in place, you tend to need a monopoly grant by the state of some kind as it will always be in one party to the cartels self interest to break out and make extra profit and hope he does not get found out! I would never hold funds in a FRFB if I could hold funds in a 100% RFB, my funds are irreplaceable as they are for most ,therefore not worth the risk. In a truly free banking world ex the state I see very little activity of the FR variety developing anyway.
Morning Toby
This has been a most informative discussion. It seems we are pretty much in agreement on everything! You are right that it is best to have everyone of differing views but the same basic philosophy on board. I think it was Lyndon Johnson who once said: “it’s probably better to have them inside of the tent pissing out, rather than outside the tent pissing in.”
It is great that we have the Cobden Centre in this country as a focal point for Austrian economics, and it is great we have at least one MP fighting our corner. Also, Ron Paul seems to be doing quite well over in the US at the moment.
Keep up the good work!
Evening Simon,
Thank you for your kind comments – I address your last point to all people involved with the Cobden Centre.
Just one last thought Toby, although it is of course none of my business, I hope you have at least some of your money in physical gold. If this pile of excrement we call a financial system finally implodes, it may prove to be an excellent investment. I have seen some reasonable arguments that suggest that gold could go as high as $56,000 an ounce. Of course most people pooh-pooh this analysis; but what happens if all the government bond markets collapse simultaneously, where will all the money go?
Lets put it this way, I have more faith in the money of the people, gold and silver than I do the paper liabilities of my Sovereign.
Back to Baker’s topic: well done!
I have never pondered about that biblic episode, just thought it could be a way to “explain” the variety of languages and the historical accident of the first metropolis (Babel was full of people from anywhere, the fall of its empire expelled them abroad).
Baker’s interpretation inspires lots of things. Here is mine: people miss or forget the origin of discussions, and tend to develop their own languages or gergal forms; with the passing of time, the use of certain words or expression or gergos enter their reasoning – as we, human kind, do not translate our thoughts into a language, but direcly let our reasoning spring up and develop verbally, so language is per se “thinking” – Orwell 1984 docet). In the end, people tend to identify their gergos with their thoughts, words overwhelm concepts and messages, and people can no longer communicate (and elaborate) properly, thence incomprehensions come, and intellectual diasporas can occur, as Baker exposes.
For instance: if you insist call “deposit” – with its resounding of mere letting things apart for mere custody – something which is actually a “lending” – which involves private property and contractual will to sell it – you can develop a diverging thread of thought.
If you insist conceiving “reserve” as “collateral” you deny its nature of “liquidity cushion” which has nothing to do with the soundness of circulating money.
If you insist blurring money as material support for bilateral relations of credit with the content of the relation itself (credit), you deny that people can develop a train of transactions during the time without the exchange of a single coin or bank account tranfer (e.g. today you cut my hair for a value of € 20 but I do not pay, as next month I paint your bike for a value of € 40, the following month you will help me with my income statement which otherwise I should pay € 30 for… this is not barter, these are transaction valued by money and settled with a credit accountancy).
And viceversa, of course, I am not here to say who is right.
As Baker implicitly suggest, it is a matter of language – and the way we exchange language for thought.
As Simon Bennett says, a unified set of proposals that can actually work and get votes is essential. We must have a compromise position, or acheive as much as the People’s Front did.
Seems to me that artifical credit / excess liquidity is the problem. That is fed partly by fiat currency, partly by FRB. Could one compromise solution be that our central banks must issue asset-backed currency and that our retail banks have a minimum reserve of say 50%?
George Selgin – I did not mean to suggest that each depositor can specify what reserve their bank holds, merely that a functioning free market in bank services could not demand 100% reserve. After all, at any given moment a bank’s assets may be worth 99%, or 105% of their loans. Who is to say what is the ‘right’ amount?
Croydonius,
A bank’s loans are it’s assets. I suppose when you mean loans you mean it’s liabilities, the loans that have been made to the bank.
Well, a bank’s liabilities must always be worth more than it’s assets, if they aren’t then the bank is bankrupt and it’s creditors will force it to enter receivership.
The debate over reserves is about how much of the assets backing current accounts should be reserves.
For Leonardo: Though it’s true that words are often abused, especially by politicians, it’s also the case that they frequently acquire unusual meanings in an entirely innocent (if obscure) way. In the States, for instance, you might go to a restaurant and order an egg cream, some buffalo wings, and a hot dog; but you would be getting a drink that has no egg in it, wings that are actually from chickens, and a sausage made with beef and perhaps pork but (one hopes) no dog at all. In every case the connection between the thing itself and the word used to describe it is absolutely unapparent–far more so than in the case of what is called a bank “deposit.” Yet know one would suggest that for this reason of accusing restauranteurs of misleading their customers.
By the way, since you are not American but may be curious, despite the lack of fraud I strongly advise against the meal in question.
@Selgin
I am not talking about abusing words, which implies the will to distort the meaning. I say that it is “natural” that the use of certain words (gergos) affect they way you think, as thought itself is made of words. Anyway, if I am not wrong, we share the core of my comment.
As to my position on the debate about the legality of FRB, I have already exposed my thought in other comments and it is not of interest for the current topic.
Hot dogs, I know them, hope to have a trip to the States and taste the original ones. The other stuff is not so inspiring to my Italian taste.
Under a denationalised monetary/banking system, I find it hard to understand how there could be a single currency such as the GBP. It only makes sense to me if each bank makes it own notes and [token] coins. This is particularly true if there are fractional-reserve banks. For full reserve banks, it would seem possible that they could share coins and notes but perhaps that isn’t best when considering the stability of the system.
If that’s the case – perhaps a big “if” – then surely it doesn’t matter if you have fractional-reserve banks and 100% reserve banks as their notes/coins cannot be confused and the fractional banks cannot inflate the money of the full reserve ones.
The point of money is that it can be used to buy all goods and services. If a “money” doesn’t come close to that ideal then it really isn’t money. That fact disciplines the issuers of money. If there are good reasons to believe that a bank is shaky, then it’s notes will no longer be accepted on par with others. It’s doubtful that notes will “float” like the modern forex market because in any particular region there will be one dominant unit of money. So, any note produced by a bank must be convertible into that unit. In the past periods that we know of that were closest to free-banking inconvertible notes were not successful. In the past that base money has been gold or silver, and it may be again, though fiat money is also a possibility.
The money of different countries and regions may float as they do today, but it’s not very likely in one country.
Right, it seems obvious to me that the notes of banks would be convertible to gold (or silver). Does that mean they need to be convertible at the same rate? Preferably, I guess. However, it also seems obvious to me that fractional-reserve banks ought not to be convertible on par with full reserve ones. I think that’s the main objection to FRB.
Historically the notes of many fractional reserve banks have circulated at par with gold and silver coinage. That is, they have circulated at par with base money. I’ve heard this “theoretical history” idea from 100% reserve supporters before. The problem here is that since in actual history things didn’t happen like this it casts doubt on the theory doesn’t it?
There are good reasons why people hold fiduciary media despite the extra risk. With notes it’s simple inconvenient to do otherwise. With bank accounts the bank can offer extra services to offset the extra risk.
Before deposit insurance every bank account balance came with some extra risk compared to the same amount of fiat notes or coins. But, because banks provide extra services that notes and coins don’t provide customers are prepared to take some extra risk.
In this era many people are probably unaware of the risk of banks going bankrupt, especially since deposit insurance protects them from that risk. But, before that people still used bank accounts.
Correction:
I seem to remember from history – see Checkland and the Bullion Report notes with option clauses trading at a 4% discount and various other rates. One of the reasons they were banned due to the instability caused by them. The rights or wrongs of this are of course another matter.
It sometimes happened with option clause notes because it was thought that the option clause would be invoked if they attempted to redeem the note.
With normal FR notes though there is no reason not redeem a note of a bank you don’t trust.
This is part of the reason why I favour laws that allow competition between banks offering notes that are redeemable on demand and with an option-clause. There are various advantages and disadvantages to each, for the customer and for the bank.
People often use the US 19th century banking system here as a counterargument. The problem with that is that most banks there were strictly limited in geography by local laws. That meant that notes from banks a long way away were always doubtful.