Callahan has written two posts on fractional reserve banking, which are well worth reading:
“The ‘Immorality’ of Fractional Reserve Banking Revisited,” May 23, 2009Callahan is a pro-fractional reserve banking (FRB) libertarian, and the Austrian school is in fact divided between pro- and anti-FRB wings (for the pro-FRB position, see Selgin and White 1996).
“That Old-fashioned, A Priori History,” December 23, 2010
The pro-FRB Austrians are in fact the only ones who really do have a logically consistent argument for free markets, economic freedom, and free contract.
The anti-FRB Austrians such as Murray Rothbard hold a position that is incoherent and would require restriction of free contract and private enterprise – so in fact such Austrians, by their own demand for pure laissez faire – demand an “evil”, collectivist, anti-freedom ideology requiring limits on private liberty.
The only logically-consistent Austrians are the pro-FRB and free banking ones. But such libertarians must face the fact that there is overwhelming empirical evidence from the 19th century that their free banking system had a business cycle and asset bubbles.
When FRB systems collapsed – as, for example, the case of Australia in the 1890s when it had no central bank and was on the gold standard (Hickson and Turner 2002) – the result was catastrophe, a debt deflationary depression as bad as the Great Depression of the 1930s.
BIBLIOGRAPHY
Hickson, C. R. and J. D. Turner, 2002, “Free Banking Gone Awry: The Australian Banking Crisis of 1893,” Financial History Review 9: 147–167.
Selgin, G. A., and White L. H. 1996. “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics 9.2: 83–107.
Gene Callahan laments that while Mises never believed in a priori history, his followers did.
ReplyDeleteNow, I am not sure which followers in particular. Rothbard himself had explicity taken a stand against a priori history, and demanded that when his fellow Austrians examine current events, they don't assume intentions of, say, the Soviets about whether they do or do not want war. One of his most interesting articles was one in which he examined specific military actions, military buildups, and treaties after Soviet wars to see what was going on and suggest that others merely observe the facts without making prejudgment about whether Soviets would or would not attack.
Interestingly, even after examinining the facts, Rothbard followed the style of Nassim Nicholas Taleb in not drawing or making any definite or final conclusion - historical analysis is never possible because it leads to narrative fallacy and confirmation bias. History is just a series of events that may admit of no other explanantion than themselves; any assumed cause-and-effect relation is a plausible speculation but not a correct one.
Of course, Callahan does say he refers to internet followers of Mises, but what is an internet follower of Mises? The kind who just read a few Mises.Org articles and covered up the rest from Wikipedia or YouTube? I have read several books by Austrian School, Chicago School, neoclassical, or Keynesian economists since I was 14, but I would not call myself a follower of any of them, because it takes much more effort.
Interesting comments - but my main point is about the logical inconsistency of the anti-fractional reserve banking (FRB) Austrians.
ReplyDeleteCallahan makes good points against the anti-FRB Austrians/libertarians.
History is just a series of events that may admit of no other explanantion than themselves; any assumed cause-and-effect relation is a plausible speculation but not a correct one.
I think you confuse history as a social science with the "past". I study history as an academic, by the way. This is my profession.
The past is a serious of events. We can only have imperfect knowledge of it, in accordance with the range and reliablity of our sources.
I always assumed that we use induction in history to draw highly probable conclusions about what happened in the past based on empirical data, but with careful scrutiny of data for biases, errors, limitations etc.
But then of course in discussion with people who are well-versed in philosophy, you get endless complaints that we are subject to the problem of induction, just like the natural sciences.
One way around this I am told is to adopt a type of Popperian methodology for history, as in this study:
Guliano Toraldo di Francia, 1995/96. “Historical truth,” Foundations of Science 3: 407–416.
Two things worth noting:
ReplyDelete1) Gene Callahan was an anarcho-capitalist. Now, he is something more like a conservative (in his approach to politics, nothing to do with neo-cons, the Republican Party and so on), a follower of the ideas of Michael Oakeshott.
2) Every libertarian thinks fraud (as well as robbery and initial aggression) should be outlawed. Rothbard (and his followers) consider FRB a way of fraud, because they consider money a "present good", and with FRB it seems that more than one party can enjoy they fruits of that good. They consider that private property is a way of excluding other from use and control of a resource, and FRB does violate that.
That doesn't mean I agree with that, but I wanted this to be clear.
Is a liberal truly inconsistent if he tries to appeal to traditional Anglo-American contract law? As far as this FRB issue is concerned, I mean?
ReplyDeleteIf we had to present a FRB-related case to a courtroom judge or a lawyer, and said, "Look, this banker took my money as a deposit. I see from his balance sheet that he does not have enough funds to redeem my deposit. Can I sue him for anticipatory breach?" Given Anglo-American laws of the past 300 years, the answer would probably be no. Supposedly, if this had been any other similar situation, the answer would have been yes. Rothbard complained in What Has Government Done With Our Money? that the law has double standards when it comes to banks.
I mean, we may say that liberals are inconsistent in wanting courts to put restrictions on private liberty by enforcing contracts and thus restrict private liberty. But in that case, Rothbard would only be as inconsistent as every other famous liberal, no?
Of course, Rothbard made a mess by trying to enter the issue of law. Case laws are complicated, involve great interpretation, and result in different conclusions from experts of law. That's why I feel uneasy discussing this FRB issue from a "moral/legal" POV.
"Is a liberal truly inconsistent if he tries to appeal to traditional Anglo-American contract law? As far as this FRB issue is concerned, I mean?"
ReplyDeleteGeorge Selgin, "Those Dishonest Goldsmiths."
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709
The major problem with Rothbard's position is that fractional reserve banking was a natural evolution, a product of the business needs of banks to meet the demands of their customers and to make a profit.
ReplyDeleteNo government forced the banks to lend MORE than their gold reserves. They passed laws to enforce a minimum reserve, not a maximum. Which raises the interesting question: why did no entrepreneur create a 100% reserve bank? If, as Rothbard suggests, this was what consumers wanted then why was no such bank created? Surely they would have quickly secured market share? This seems a centuries long example of market failure...
Ultimately, though, Rothbard's position seems to be that HE knows more about an industry than the capitalists within it. Moreover, based on that knowledge, HE wishes the law (i.e., the state) to regulate that industry by imposing what HE considers best.
How ironic -- an "Austrian" arguing for state intervention and regulation to stop entrepreneurs seeking to make a profit meeting the needs of their customers...
Suffice to say, the "Austrian" Business Cycle theory is an ideological attempt to excuse capitalism for its recurring crisis. It is not based on understanding how capitalism works but rather an ideological notion of how it should work. Moreover, it is rooted in equilibrium theory ("the natural rate of interest") while "Austrian" ideology nowadays pays lip-service to rejecting equilibrium.
All in all, the "Austrian" Business Cycle theory seems more like an exercise in irony than an attempt to understand how capitalist banking works.
As one post-Keynesian economist notes the the "Austrian" theory of the business cycle "not only proved to be vulnerable to the Cambridge capital critique . . . , but also appeared to reply upon concepts of equilibrium (the 'natural rate of interest', for example) that were inconsistent with the broader principles of Austrian economic theory." (J.E. King, A history of post Keynesian economics since 1936, p. 230)
And talking of which, these papers are worth looking at:
Robert L. Vienneau: "Some Capital-Theoretic Fallacies of Austrian Economics"
Robert L. Vienneau: "Some Capital-Theoretic Fallacies in Garrison's Exposition of Austrian Business Cycle Theory: A Research Note"
Iain
An Anarchist FAQ
Iain,
ReplyDeleteThese are insightful points - I agree completely.
Thanks for the links, which I will read.
There is no doubt that FRB was an invention of the free market, was a fundamental part of it, and even if it were abolished, that would still not end the business cycle, because of uncertainty and subjective business exepectations causing fluctuations in investment and consumption - as well as all the other "leakages" from aggregate income that destroy Say's law.
Regards
LK, FRB exists only because people are too ignorant to understand it's theft before they scramble to withdraw their deposits. 99% of people out there have no idea how FRB works even NOW, not to mention at the end of 19th century. One can only wonder what would happen if ordinary people were educated that private banks have license to print money. FRB might well disappear overnight. Note bankers never explain the deposits are actually being relended. Instead, bankers always try to conjure the false image of safe vaults. In other words, FRB should be made illegal on purely utilitarian grounds, as the biggest lie in history. But then I guess if we actually had a libertarian society, most people would be sophisticated enough for the utilitarian argument against FRB to be no longer valid. The whole FRB sham relies purely on society being ignorant.
ReplyDeleteBTW, anonymous, one famous example was Bank of Amsterdam in 17th century:
http://en.wikipedia.org/wiki/Bank_of_Amsterdam
"The Bank was at first a strictly deposit bank with 100 percent backing"
You are wrong:
ReplyDeleteGeorge Selgin, Those Dishonest Goldsmiths
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709
FRB did not arise by fraud, and, as Selgin shows, English banking practice and law were perfectly capable of distinguishing a depositum from a mutuum account.
When FRB began, people understood their money was being lent out - a FRB account was a mutuum contract, with a call option, either in whole or part.
The Australian 1890s banking system restructuring does not appear to be as bad as you suggest, from a free banking gold standard perspective. The banking system was restructured without going off the gold standard, which meant that money could serve its function without interruption or distortion. The capital restructuring of individual troubled institutions resulted in shareholders and creditors taking their losses while the business of the institution was saved. In fact I'd suggest this episode as model for how to deal with such problems in the present and the future -- only pre-programme the restructurings so that they can be done in 1 business day rather than taking weeks or months. See http://www.lostsoulblog.com/search/label/creditor%20recapitalisation and
ReplyDeleteYou must live in some alternative reality then. ALL the people I know (except economists) have absolutely no idea what "a mutuum contract with a call option" is. Am I now to believe it was different in 19th century? Is your wife an economist or a lawyer? No? Then ask her please if she is aware that "FRB account is a mutuum contract, with a call option". It's so much fun to talk with you, but looks like you've been spending too much time in your ivory tower again.
ReplyDeleteBTW, also, a hint, there may be some difference between lawful and honest, would you like examples?
ReplyDeleteJoanna Liberation,
ReplyDelete"FRB did not arise by fraud, and, as Selgin shows, English banking practice and law were perfectly capable of distinguishing a depositum from a mutuum account."
You have not refuted Selgin.
"ALL the people I know (except economists) have absolutely no idea what "a mutuum contract with a call option" is"
If people did not understand the basic fractional reserve banking, there would NEVER have been any bank runs in history.
Yet bank runs are ubiquitious - there is something very much wrong in your argument.
As for today, with deposit insurance and a central bank as a lender of last resort, this means that your money will ALWAYS be available under FRB, even in crises - so it is not the same FRB system that existed before 1914 (advent of Fed) or 1933 (advent of deposit insurance).
1) I have written about the Australian case briefly in Theory of Free banking and at somewhat grater length in my JFSR article "Bank Lending 'Manias' in Theory and History." briefly, I don;t think it at all fatal to the free banking case. It merely shows that such a system isn't entirely immune to crises involving substantial numbers of bank failures. But we mustn't judge a system unacceptable merely because of one or a small number of rare catastrophes. Doing so is committing the very same error some are making in claiming that Japan's present nightmare proves nuclear power to be an entirely unacceptable technology.
ReplyDelete2) "one famous example was Bank of Amsterdam in 17th century:
http://en.wikipedia.org/wiki/Bank_of_Amsterdam
"The Bank was at first a strictly deposit bank with 100 percent backing"
Actually, it is the only prominent example of a 100-percent institution, and even it (as the statement concedes) didn't remain on a 100% reserve basis for long. Against it, we have all the rest of banking history as evidence of the overwhelming predominance of fractional reserves in every manner of bank regulatory regime (but none, so far as I am aware, that actually prohibited 100-percent reserve banking).
So, 100-percenters: come up with some more examples, or explain why you cannot!
"Yet bank runs are ubiquitious [sic]- there is something very much wrong in your argument."
ReplyDeleteNot so. Runs on solvent banks are extremely rare, and have always been so. Most runs have been on banks that are 9with good reason) perceived to be insolvent, that is, on banks that suffered, not from holding only fractional reserves, but from holding loans and other assets that went sour. (It should go without saying that there's nothing wrong with such runs in a competitive system.)
I should ad that Lord Keynes is quite correct to indicate that, in so far as any runs occur, the fact goes to show that people are indeed aware of the fact that banks only hold fractional reserves.
ReplyDelete"I have written about the Australian case ... I don;t think it at all fatal to the free banking case. It merely shows that such a system isn't entirely immune to crises involving substantial numbers of bank failures. But we mustn't judge a system unacceptable merely because of one or a small number of rare catastrophes"
ReplyDeleteSuppose everything you say is true. Is there then still no case at all for an effective regulatory system and lender of last resort to prevent even rare disasters from even happening?
A rare "catastrophe" like Australia's depression of the 1890s caused a great deal of human suffering, so what do you say in response to a consequentialist who will tell you that letting it happen in the first place is immoral?
That the effects of a debt deflationary depression induced by a collapsed asset bubble and imploding free banking financial system are too high a human price to pay?