Friday, December 9, 2011

My Posts on Fractional Reserve Banking

I will provide links here to my various posts on fractional reserve banking:
“Fractional Reserve Banking: An Evil?,” June 26, 2010.

“The Romans and Fractional Reserve Banking,” February 23, 2011.

“Gene Callahan on Fractional Reserve Banking,” February 18, 2011.

“Lawrence H. White refutes Huerta de Soto on Fractional Reserve Banking,” February 22, 2011.

“Selgin on Fractional Reserve Banking,” June 1, 2011.

“Schumpeter on Fractional Reserve Banking,” June 12, 2011.

“If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?,” September 29, 2011.

“The Mutuum Contract in Anglo-American Law,” September 30, 2011.

“Rothbard Mangles the Legal History of Fractional Reserve Banking,” October 1, 2011.

“More Historical Evidence on the Mutuum Contract,” October 1, 2011.

“What British Law Says about the Mutuum Contract,” October 2, 2011.

“If Fractional Reserve Banking is Voluntary, Where is the Fraud?,” October 3, 2011.

11 comments:

  1. Speaking of banking, have you read "A Treatise on Money" by John Maynard Keynes?

    ReplyDelete
  2. I've read parts of it, but alas, not the whole thing.

    ReplyDelete
  3. I see. What did you make of it? Also, have you seen Dr. Brady's review of Allan Meltzer's "Keynes's Monetary Theory: A Different Interpretation"? Keynes hardly saw monetary policy as unimportant...

    http://www.amazon.com/review/R14MIT3DMTD79N/

    ReplyDelete
  4. Absolutely no evidence of having read Hoppe's "Economics and Ethics of Private Property" and the critique of Selgin and White therein.

    Absolutely no evidence of showing any knowledge in how which specific regulations can stop the INEVITABLE effects of credit expansion, since the problem of credit expansion is not one of lack of regulation, but one of distorted information.

    ReplyDelete
  5. I always find the FRB/full reserve banking argument among Austrians interesting. Frankly, I'm no legal historian, so its hard to take a strict side. But I think the problem is the key (educated) people on both sides of the debate are arguing with different terms. And the problem is that much of the evolution of banking has developed on legal interpretations and theories and ancient traditions, etc etc. And its always had its proponents and opponents, ranging from classical economists to certain founding fathers and Jacksonians.

    Another part of the problem is that with legal history, different institutions can develop across different economic environments with different rules. For example, I'm pretty sure that whenever U.S banks suspended specie payments, they needed state action (and this really depends on which states). But for Scotland, it seems that each contract had a built it specie suspension clause. Someone who only looks at one area can draw different conclusions on the legality of "specie suspension".

    In terms of definitions, the FRB advocates seem to believe that a "demand deposit" really means

    "By loaning your money to Patch Bank you always have the ability (aside from business hours) to demand the same amount of money at any time. However, this receipt is not an ironclad claim to a certain amount of goods, but only a promise by the bank and we may or may not have the sufficient funds. This bank note/bank deposit/check is NOT a perfect substitute for money, but only a claim that may or may not be honored. In return for taking this risk, you will receive interest. "

    Whereas 100% Reserve people say that

    "By depositing your money with the Patch Bank you always have the ability to demand a certain amount of money. You retain ownership not over a specific amount of funds, but just a certain amount of fungible money. Patch Bank promises to honor this claim at all times (aside from business hours) or be in violation of breach of contract."

    A major part of the problem is how bailment law developed. Something is only a bailment if it has been earmarked. A bailment can only be for a specific good, never a fungible claim.

    Legal developments clearly differed in the case of grain versus banking.

    For some analysis of grain banking, or some evidence that grain warehouses offer non specific bailments, see:

    "Fractional Reserve Banking in Grain"-Jeffrey Williams

    http://legisweb.state.wy.us/statutes/statutes.aspx?file=titles/Title11/T11CH11.htm

    http://www.econ.iastate.edu/~harl/RightsOfFarmersInFailedGrainElevators.pdf

    ReplyDelete
  6. "For example, I'm pretty sure that whenever U.S banks suspended specie payments, they needed state action (and this really depends on which states). "

    If you mean governments allow suspension of specie sometimes, while that is true, many times governments have legislated to stop banks from inserting "option clauses" in their demand deposit contracts allowing them suspend specie payments for a temporary period.

    This is shown clearly by Selgin, Bank Deregulation and Monetary order, p. 247.

    ReplyDelete
  7. "Something is only a bailment if it has been earmarked. A bailment can only be for a specific good, never a fungible claim. "

    That is rubbish: You're saying I can't request a hotel to keep my $1000 in their safe overnight as a bailment?

    ReplyDelete
  8. "Absolutely no evidence of showing any knowledge in how which specific regulations can stop the INEVITABLE effects of credit expansion, since the problem of credit expansion is not one of lack of regulation, but one of distorted information. "

    "Inevitable" effects, my eye.

    Amyway, credit expansion per se is not nesecessarily a problem, it is the flow of credit to fuel leveraged asset speculation that is the main problem.

    ReplyDelete
  9. "If you mean governments allow suspension of specie sometimes, while that is true, many times governments have legislated to stop banks from inserting "option clauses" in their demand deposit contracts allowing them suspend specie payments for a temporary period."

    Yes, which may have resulted from the "ambiguity" between what a demand deposit is, or some regulation that tried to stamp out 'excessive' risk taking by FRBs. I'm not sure, I'd need to look into it. All I know is that most banks had to go through the states to suspend specie payments. I can't read Selgin because I don't have the book, nor can I find a pdf file.

    "That is rubbish: You're saying I can't request a hotel to keep my $1000 in their safe overnight as a bailment?"

    yeah, but thats "your" $1000. The bailment has to be a claim to a specific good, not a fungible good, as you have pointed out in all of your definitions of bailment. Part of the problem/ambiguity on FRB seems to result from legal interpretations that because money was given to a bank that was not expressively marked (what they considered a bailment), it now represented a loan to the bank and all the rest of it. As I have tried to point on with the articles on grain warehousing, its interesting that two different legal interpretations can result from this.

    Again, not taking sides.

    ReplyDelete
  10. "All I know is that most banks had to go through the states to suspend specie payments. "

    Not true. The so-called “option clause” (to suspend specie payments temporarily) was used freely in private FR banking contacts in Scotland from 1730-1765; Sweden from 1864-1903 and Canada during the 19th century (Selgin, Bank Deregulation and Monetary order, p. 247). The banks required no government support or intervention to allow them to suspend specie payment in liquidity crises.

    The option and discretion in a bank's FR contract that in some circumstances they will exercise their right to suspend payments temporarily until they can obtain the liquidity they need for meeting their obligations is perfectly possible and even succesful free contact: you don’t need the “wicked” or “evil” government to enforce temporary suspensions of specie payment in such a case:

    “Historically, bankers have developed innovative contracts to attenuate the likelihood of panic runs. One example is the ‘option clause’ that came to be a standard provision in private bank notes circulating in Scotland during its 18th ‘free banking’ era ...

    The option clause gave the bank directors the right to suspend specie payment for up to six months, but the bank then promised to pay a high rate of interest on the notes during the period of suspension. This clause allowed the banks to stop "panic" runs and to have more time to adjust to negative-liquidity shocks ...”

    http://books.google.com.au/books?id=mAHsmzdUbsIC&pg=PA30&dq=%22Historically+bankers+have+developed+innovative+contracts+to+%22&hl=en&ei=hR-GToGVPJOeiQeK5bG1Dw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC0Q6AEwAA#v=onepage&q=%22Historically%20bankers%20have%20developed%20innovative%20contracts%20to%20%22&f=false

    If that “option clause” was in your contract and the bank decides to suspend for a temporary period, that isn't fraud - it is free contract.

    ReplyDelete
  11. Lord Keynes, you have completely, 100%, misunderstood or misrepresented what I said. I was talking about the UNITED STATES. Not Scotland, not Sweden, Antarctica, and not Mars. The United States. All you've done to show is that specie suspension can be deemed legal in other regulatory environments, which is what I said in my first post:

    "Another part of the problem is that with legal history, different institutions can develop across different economic environments with different rules. For example, I'm pretty sure that whenever U.S banks suspended specie payments, they needed state action (and this really depends on which states). But for Scotland, it seems that each contract had a built it specie suspension clause. Someone who only looks at one area can draw different conclusions on the legality of "specie suspension"."

    ReplyDelete