Jonathan Finegold also declares that anti-fractional reserve banking Austrians are “increasingly in the minority.” He even groups Roger Garrison amongst the pro-fractional reserve group. I have yet to see other Austrian responses.
All I can say is: this is good news. The anti-fractional reserve banking Austrians are easily the worst and most ignorant subgroup of the whole Austrian school. They take their views from the work of Murray Rothbard, Hans-Hermann Hoppe, and Jesús Huerta de Soto.
But the next question the pro-fractional reserve banking Austrians must answer is this: if fractional reserve banking is acceptable, then why doesn’t its creation of credit money/fiduciary media not artificially lower interest rates and cause endless Austrian trade cycles? If they admit that Austrian trade cycles would result, then they have admitted (on the logic of their own theories) that capitalism is inherently unstable and leads to endogenous business cycles.
If they choose to deny that Austrian trade cycles would result, then all I can say is that they have some explaining to do.
This also seems to be the perfect time to update a set of links to my own posts on fractional reserve banking below. Without exaggeration, I think I can say that the most comprehensive debunking of the anti-fractional reserve banking Austrians can be found on my blog in the following posts:
“Bibliography on the Irregular Deposit (depositum irregulare) in Roman Law,” September 6, 2012.
“Huerta de Soto on Banking in Ancient Rome: A Critique,” September 2, 2012.
“Huerta de Soto on Justinian’s Digest 16.3.25.1,” September 1, 2012.
“Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique, August 31,” 2012.
“A Simple Question for Opponents of Fractional Reserve Banking,” August 17, 2012
“More on Goldsmiths’ Notes and the Act of 1704,” May 13, 2012.
“Funny Money: A Loaded Phrase,” May 12, 2012.
“Hayek’s Original View of Fractional Reserve Banking,” February 29, 2012.
“Fractional Reserve Banking, Option Clauses, and Government,” January 31, 2012.
“Are the Public Ignorant of the Nature of Fractional Reserve Banking?,” December 17, 2011.
“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.
“Callable Option Loans and Fractional Reserve Accounts,” December 16, 2011.
“Future Goods and Fractional Reserve Banking,” December 15, 2011.
“Rothbard on the Bill of Exchange,” December 11, 2011.
“Hoppe on Fractional Reserve Banking: A Critique,” December 11, 2011.
“The Monetary Production Economy and Fiduciary Media,” December 11, 2011
“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.
"If they choose to deny that Austrian trade cycles would result, then all I can say is that they have some explaining to do."
ReplyDeleteSupporters of FRB simply believe that cash balances held on deposit at banks (and indeed bank notes held by the public) count as savings and can be used as reserves for bank lending purposes. This will be reflected in the interest rates which will thus accurately reflect the underlying natural rate of interest. Based on this FRB should not cause a business cycle.
FRB creates money and expands the money supply.
DeleteE.g., in the old days, private banknotes.
That is, according to Hayek, a sufficient cause of Austrian business cycles:
http://socialdemocracy21stcentury.blogspot.com/2012/02/hayeks-original-view-of-fractional.html
That was Hayek's vies at that time.
DeleteRead "the denationalization of money" and you will see his views had changed to the extent that he saw any distortions caused by private currency over-issuing as minor compared to what could happen under a central banking regime.
However I think Selgin (Theory of Free Banking) has developed a much more sophisticated model of Free Banking than anything in Hayek. He explains why FRB not only does not cause business cycles but in fact stabilizes the economy by acting to match the supply of money to the demand and thus tends to minimize the likelihood of episodes of monetary disequilibrium that themselves would contribute to boom/bust.
Hey Lord Keynes, it seems that you've misunderstood Jonathan. Garrison is a "Selgin style" free banker - I know this cause he told me so :)
ReplyDelete"Garrison is a "Selgin style" free banker"
DeleteThis means he supports fractional reserve banking.
I have made no mistake above.
Jan said:You see Lord Keynes,this group of Neo-Austrians don´t even know what differs one sub-group from the other in this tiny little clique.I think they should thank you for enlighten them about what position they actually should take in different policy issues,so they don´t argue against their own inner beliefs by mistake.
DeleteYep, I know that. I've misunderstood you at first and commented straight away, only to notice that I've made a mistake. But it was already too late ;).
DeleteFair enough.
DeleteI don't see why they would have explaining to do. As long as the money multiplier functions -- which, of course, it doesn't, but the Austrians seem to think so -- then a natural rate of interest based on the amount of savings accumulated should work itself out if left alone.
ReplyDeleteIf fractional reserve banking exists?
DeleteThe whole point of the Hayekian business cycle theory is that fractional reserve banking is sufficient to cause a cycles.
See here:
Deletehttp://socialdemocracy21stcentury.blogspot.com/2012/02/hayeks-original-view-of-fractional.html
Take a fractional reserve system, but one in which a central bank engaged in no OMOs. Now we can correctly assume that all credit comes from savings. The interest rate would then adjust based on a market process, no? And this could be said to be the "natural rate of interest", no?
DeleteLet's say that reserve requirement laws allow every $10 of saving to become $100 of credit. We should then see an initial price adjustment and then the system should even out. Why? Because the quantity of money is then fixed at this newer price level.
Of course, we must then assume constant velocity in order to allow the Austrian theory any meaning. But that has always been the case.
On its own terms it appears to me consistent. But it is still garbage for many other reasons (velocity being one).
"Take a fractional reserve system, but one in which a central bank engaged in no OMOs. Now we can correctly assume that all credit comes from savings."
DeleteBut this isn't true: even without a central bank, a FR banking system creates new money by means of debt instruments.
Even the non-bank, private sector will create endogenous, new money by means of negotiable cheques, bills of exchange and promissory notes.
Yeah, I agree. But the Austrians don't accept that. They rely on the same mechanistic [MV = PQ] argument that the neoclassicals and the monetarists use. I'm only pointing out that in their own terms they are consistent on FRB. They are wrong on many fronts -- what you said about debt instruments; velocity is not constant etc etc
DeleteI think you bring to light a meaningful intersection of Austrian and post-Keynesian theory here. From my perspective, as a student of both sects, endogenous money and Austrian business cycles are both means of instability within capitalism. It seems that where the two diverge is in addressing specific policies and institutions that will limit the instability (or suggest other systems that better serve our collective means). My hope is that this intersection will be a jumping off point for future research among Austrians.
ReplyDeleteI would like to see a Austrian/radical subjectivist-Post Keynesian synthesis, but the Austrians would have to give up their hostility to government intervention.
DeleteIt seems to me that the Austrian theory is literally inconsistent on every single point they make -- bar none. Just because the two groups have the same vision of capitalism means little. Post-Keynesians and New Keynesians have a similar view on "what must be done", but the latter are still totally wrong in their entire scientific approach.
DeleteIn short: I'm not going to agree with a flat earther who votes for the same political party as me.
[I]f fractional reserve banking is acceptable, then why doesn’t its creation of credit money/fiduciary media not artificially lower interest rates and cause endless Austrian trade cycles?
ReplyDeleteIf the banker, depositor and payee clearly understand the nature of FRB notes, then they are by definition not misled and prices would be stated in terms of such notes. Austrian theory is based upon the artificial creation of money and credit distorting prices and misleading most everyone about relative supplies, demand and scarcities of most everything. If no one is misled, there is no impairment of economic calculation and no business cycle. I just have my doubts about FRB payors finding informed FRB payees. If they do, they do. But I'm not going to lose sleep over predicting what might happen upon the abolition of fiat money and the introduction of truly competitive free market banking.
"If the banker, depositor and payee clearly understand the nature of FRB notes, then they are by definition not misled and prices would be stated in terms of such notes"
DeleteThis is gibberish.
Once 100% reserve is gone, the money supply is elastic through debt instruments acting as new money.
That is a sufficient cause of ABCTs according to Hayek.
Since LK cannot or will not understand the central Austrian concept of economic calculation, LK will find everything about Austrian theory to be gibberish.
DeleteThe concept you're talking about - flexible prices causing market clearing equilibrium in all markets (including the labour market) or full employment equilibrium - isn't even Austrian, its standard Walrasian neoclassical theory.
DeleteMore proof of Roddis's sheer ignorance and stupidity.
http://socialdemocracy21stcentury.blogspot.com/2012/07/is-this-what-vulgar-austrians-mean-by.html
Its far from being an Austrian concept. This whole thing reminds me of a comment by Caldwell that he made while studying at NYU under Lachmann:
Delete"During the first meeting I had an exchange with Mario Rizzo about the concept of market clearing. I argued that though the speed of adjustment problem was an empirical issue, it was not something that could be tested as a general proposition. I drew the implication that one's view of the rapidity of clearing was a matter of faith, nothing more than a metaphysical one, though obviously a crucial one. Lachmann nodded his head vigorously as I was finishing up, which pleased me immensely."
Caldwell, Bruce J. 1991. Ludwig M. Lachmann, 1906-1990: A Reminiscence. Critical Review 5 (Winter): 139-44
Professor Brad De Long have a post dealing the strange hatred for FRB and other peculiar thing
ReplyDeletein that Austrian fringe group.
http://delong.typepad.com/sdj/2012/09/paul-krugman-asks-a-question-on-the-austrian-hatred-of-fractional-reserve-banking-paper-money-etc-weblogging.html
LK,
ReplyDeleteEconomic calculation is extremely important. Consider the following:
1)What resources material, labor, fixed assets do I purchase and in what quantity and price?
2)How do I price product and customers?
3)What rate of return should I have for purchase of fixed assets
4)What market should I enter or expand
5)What companies should I acquire or divest?
All of the following require economic calculation meaning measuring marginal revenue and marginal cost. Myself and thousands of other cost accountants do this every day. I am now doing my companies annual budget where decisions such as the above need to be answered.
And nobody above said that "economic calculation" in your sense is unimportant.
ReplyDeleteWhat is being denied is
(1) Walrasian market clearing "economic calculation", and
(2) that nobody outside the Austrian cult has ever understood that latter concept.
"But the next question the pro-fractional reserve banking Austrians must answer is this: if fractional reserve banking is acceptable, then why doesn’t its creation of credit money/fiduciary media not artificially lower interest rates and cause endless Austrian trade cycles?"
ReplyDeleteLK, part 2 of my Theory of Free Banking is devoted to explaining the money supply process under such a system. It includes a discussion of the very issue you raise.
I think a good set of articles that are related to this discussion are in the Critical Review debates with Greg Hill and Steve Horwitz.
ReplyDelete(1)Hill, Greg. 1996. The Moral Economy: Keynes's Critique of Capitalist Justice. Critical Review 10: 411-34
(2)Horwitz, Steve. 1996. Keynes on capitalism: Reply to Hill. Critical Review 10 (Summer): 353-72
(3)Hill, Greg. 1996. Capitalism, Coordination, and Keynes: Rejoinder to Horwitz. Critical Review 10: 373-87
(4)Horwitz, Steve. 1998. Keynes and Capitalism One More Time: A Further Reply to Hill. Critical Review 12 (Winter-Spring): 95-111
(5)Hill, Greg. 1998. An ultra-Keynesian strikes back: Rejoinder to Horwitz. Critical Review 12: 113-26
LK,
ReplyDeleteI tend to agree with Bob Roddis in that in my opinion you do have a very limited view of what economic calculation is in the real world. Economic calculation is much more then equilibrium analysis. Economic calculation is how does one measure revenue and cost with the goals/objectives of an entity. For example I am now currently involved in the 2013 budgeted process of the company I am working for. I am face with the following decisions.
1) What prices should I charge for customer/products for the coming year
2) What new hires should be added next year
3) What fixed assets should be purchase next year
4) What level of overtime is needed
5) What product lines should I invest/divest for the coming year
6) What other companies could be purchase next year
All of the above is base on an analysis of marginal revenue, marginal cost, discounted cash flows, and opportunity cost which is the heart of cost accounting in the neo-classical and Austrian price theory.
For example do you reject a rising marginal cost curve? Steven Keen the Post Keynesian does. If Keen is correct how do I take into account added a new pouch machine which greatly increase marginal cost compare to marginal revenue in the short term. In the long term yes marginal cost will start to fall with increase business for pouch but again in the short term there is rising marginal cost.
"All of the above is base on an analysis of marginal revenue, marginal cost, discounted cash flows, and opportunity cost which is the heart of cost accounting in the neo-classical and Austrian price theory."
DeleteNone of these things validates the Austrian business cycle theory, the notion of Walrasian GE, or the idea that fiat money, government spending or macro intervention are the cause of severe "economic coordination" problems.
In the era when Keynesian macro stability was the norm (1945-1970s), we had the most prosperous period in modern history in terms of per capita real output growth and low unemployment.
Didn't we still have the remnant of a "gold standard" (actually, a gold exchange standard) from 1945-1970? Didn't that somewhat constrain the system's ability to artificially create money and credit?
DeleteThe Bretton Woods system confined gold to the international payments system - between central banks/nations, mostly in trade balance transactions.
DeleteDomestically, the gold standard ended in 1933 in the US.
This discussion is baffling.
ReplyDeleteIn a fiat currency system, there is no such thing as fractional reserve lending, since there are no relevant reserves to fractionate and lend out.
Our floating Fx, fiat currency supply itself floats, in order to automatically denominate any and all real transactions that the private & public sectors decide to execute.
Modern "banking reserves" are not reserves of actual capital. Loans create deposits and trigger accounting records that we simply call "banking reserves." Banks do not lend out "banking reserves" - no matter how confused the semantics.
In a fiat system, there is no such thing as fractional-reserve banking. Unless you want to split hairs and digress into fractionating the public initiative that ultimately backs a fiat currency?
"In a fiat currency system, there is no such thing as fractional reserve lending,"
DeleteThere is no such thing as banks whose reserves do not cover their debts in the form of demand deposits/checking accounts?
I am in fact well aware of the endogenous money theory: the money multiplier is a myth, loans creates deposits and so on.
But these do not refute the fact that banks' reserves on hand do not cover the aggregate debts owed.
And, also, the discussion above is partly focused on the morality of FRB in an historical sense, before fiat money.
ReplyDeleteLK said: None of these things validates the Austrian business cycle theory, the notion of Walrasian GE, or the idea that fiat money, government spending or macro intervention are the cause of severe "economic coordination" problems.
ReplyDeleteLK said:In the era when Keynesian macro stability was the norm (1945-1970s), we had the most prosperous period in modern history in terms of per capita real output growth and low unemployment.
Yes but it does give some evidence that neo-classical cost and therefore price theory has important and factual real world things to say in spite of what the Post Keynesian Keen has to say on the subject (E.G. no such thing in reality as a rising marginal cost curve).
You mean the Neo-Keynesian synthesis was the norm which Post-Keynesians such as yourself reject. Also just because two events happen together does not mean that one causes the other. Could there be no other reason then Keynesian macro stability that cause the prosperous period. One must take all historical fasts into account and then apply a theory to give the facts a logical and constant account of the facts. Could you give me a suggestion on a good book to read on the economic history of that period? The book in question should also have a theory as to why economic events happen the way they did.
(1) neoclassical synthesis Keynesianism's actual policies from 1945-1970s were little different from those Post Keynesians would advocate today. The differences are at a theoretical level, not necessarily a public policy level.
Delete(2) "Also just because two events happen together does not mean that one causes the other."
This is a such laughable, feeble argument. Yes, any fool knows correlation is not direct evidence of causation by itself. Nowhere above was any such view suggested or stated.
But it is obvious we have direct evidence of causation mechanisms in the period in question: macro policies caused high employment and high use of resources and comparatively swift ends to recessions. This high demand encouraged much higher real per capita GDP growth as business had the sales and expectations of sales for higher levels of capital good investments.
It is well known that high employment and scare labour induces businesses to innovate and use technology in productivity gains: this is an explanation of the high productivity growth in those years.
"The differences are at a theoretical level, not necessarily a public policy level. "
ReplyDeleteThere is a significant difference amongst PK economists about what the effective price anchor in the economy would be.
For example Bill Mitchell wrote the following last week
"They claim that expansionary fiscal policy can always create full employment – which is correct. But it cannot always create full employment and price stability, which are the two key macroeconomic goals in a mixed economy.
Further, an economy that is enduring accelerating inflation will ultimately become unsustainable and governments will invoke contractionary policy and the full employment status will lapse.
The Job Guarantee approach – relying on employment buffer stocks – is the way to defeat that trade-off. "
So I would say there is a public policy difference there - which try to address the failures of Keynesian stabilisation policies in the 60s and 70s.
You're correct on the job guarantee. It and incomes policy are undoubtedly some of the policy differences.
DeleteYet even for most of the golden age (1945-c. 1971) buffer stocks in commodities had maintained price stability under neoclassical synthesis Keynesianism.