Potpourri
==> Rob Bradley in Forbes explains the long evolution of free-trade thought from Adam Smith to…me.
==> I explain that banks can fulfill their two functions even with 100% reserves.
==> I helped with some of the research, but Dan Simmons has a post at IER pushing back against the Administration’s claims about forest fires and climate change. It’s actually pretty interesting even if this isn’t usually your thing.
==> Richard Ebeling blames the Fed for booms and busts.
==> The best thing about this Gene Callahan essay on opium is that the people in the comments are mad that The American Conservative is giving a platform to libertarians.
==> Avens O’Brien has a nice post on how libertarians can win hearts and minds. (BTW, if you are ready to flip out in the comments about the brutalism/humanitarianism thing, you’re barking up the wrong tree. O’Brien’s overall perspective isn’t what such a knee-jerk reaction assumes.) An excerpt:
An excellent example here is the knee jerk reaction of libertarians to the liberal proposal that “we should do something” is immediately equated to a proposal that the government must do something. If a liberal ever says the slightest hint of “but, how will we help the [insert oppressed group here]?” a libertarian instantly assumes that government is the proposed answer (it might be) and rails against that with such fervor that it scares the sh** out of the liberal.
Ironically it’s what causes more people to feel government mustbecause people freely won’t.
When a liberal says, “let’s feed poor children”, they simply want to feed poor children, and they think the state might be a good vessel for that because they think it should happen and who would feed poor children without a benefit to themselves?
Their fear is well-reflected in the libertarian response: “No, you can’t force me to feed poor children.”
Instead of a much more reasonable response of: “Hey, you’re right, there may be hungry poor children out there. Wouldn’t it be nice if you and other people who care about feeding poor children could easily gather together to start an organization that feeds poor children efficiently? That I can donate to willingly? I highly recommend you do that! I know others who have this particular inclination towards feeding poor children. Perhaps I can introduce you.”
If liberals think libertarians may actually help if they weren’t forced to, they might be less compelled to try to force it.
I appreciate the link back! I know it’s a long post, but there was a lot I wanted to cover in it! 🙂
Thanks for sharing it!
O’Brien: “If liberals think libertarians may actually help if they weren’t forced to, they might be less compelled to try to force it…”
What if I don’t want to help the poor?
What if I don’t share all the goals of the liberal that I am talking to? There are hundreds of them, maybe more. Am I suppose to agree with all of them so that he or she agree to not “force it”?
I learned that obviously Gene is paid by George Soros.
And that proves now what I already think for quite some time, Gene has lost sight of depth, when he thinks that he isn’t a “libertarian”. Don’t get me wrong, he isn’t a Rothbardian or ancap*1 etc.. But I guess for most people in the world he will classify as libertarian when he states his views. And the only other people who might agree with Gene that he isn’t are libertarians themselves (Rothbard or Ancap grade).
*1 Please note that he is against prohibiting secession, which in my view makes him still quite an anarchist, he just thinks allowing for that would not make much of a difference (which might very well be true… or not?). However all the other people I saw talking about secession who supposedly are on Genes side, never said anything remotely like this…
http://gene-callahan.blogspot.co.at/2012/10/would-you-secede.html
I think one of his points is that there is a big difference between holding views that could be described as libertarian on specific practical issues, and identifying yourself as a libertarian in the ideological sense.
Attempting a stretch of an analogy: I might mostly agree with Jesus on how we ought to live our lives, but that doesn’t mean I’m a Christian.
Matt, I am not sure. I don’t want to start a discussion when someone is a libertarian and when he is not. To be a Christian is very well defined. You have to believe in Jesus and God. When someone is a libertarian, or a classical liberal etc is not so clear (see e.g. the brutalism discussion).
What is clear (at least to me) is that although Gene loves to fight with libertarians, he shares effectively a lot more views with them, than the people he likes to side with in those debates he engages.
However that is just my impression, and the point I have given about secession, and the reaction in the comments to Gene’s article in the American Conservative indicate that I shouldn’t be that wrong with this view.
Liberals scream constantly about wealth disparity and never question our monetary system (as a whole).
I take the Gary North view to heart and believe that “our” system would just replace the faces of the uber wealthy. The difference is that in our system, the uber wealthy would be producers and not renters of free money.
“Banks aren’t in business, nor could they remain in business if they simply warehoused money.”
Obviously banks wouldn’t function as they do now. and he provides the answer later on,
“if such a bank in fact existed, it would have to be paid to warehouse the money. To be more explicit, customers of “deposit banks” would pay those banks to hold onto their funds. It’s called a negative interest rate.”
Right……. and what is the difference between the inflation rate and the return on cash, checkings or savings accounts?
“Instead, they borrow money from depositors seeking a return on their savings, and who don’t need access to their savings right away, only to lend the money borrowed to individuals who do need it right away. ”
He’s literally saying that when the bank lends, it debits Peter’s account to pay Paul.
” and that the state should abolish “fractural banking” in favor of banks backed by “100 percent reserves.” To Austrians, fractional banking leads to “excess credit creation” through what they refer to as a “money multiplier.””
All wrong.
“banks are generally required to keep a 10% deposit cushion. Simplified, if a bank is the recipient of a $1,000 deposit, it can generally only lend out $900, or 90% of its deposits.”
All wrong.
“Though Keynesians and modern Austrians may tell you otherwise, money doesn’t grow on trees, nor can it be multiplied.”
Odd point. Can we agree that credit money comes from nothing?
“for one individual to attain access to $1,000, someone else must give up that same access. Credit can’t be multiplied. Period. For every individual who attains credit successfully, there must be a saver willing to give up near-term access to the economy’s resources.”
The bank creates an account entry on their assets.
A corresponding account entry is created on their liabilities.
In this process, they did not change Peter’s online banking password to block access to funds.
They did not lower Peter’s account balance.
I have a new one for the “you might be in serfdom” list:
If your country passes a law that makes body armor illegal…
http://www.sovereignman.com/trends/congress-proposes-new-law-prohibiting-body-armor-in-the-land-of-the-free-14877/
Unfortunately there is no amendment in the constitution for the right to keep and bear body armor…
From Murphy’s Mises Canada post:
“Let’s start with the basics: There are two functions that banks serve:
(1) They act as credit intermediaries, in which the banks take funds from savers and channel them to borrowers.
(2) They act as warehouses, in which the banks store their customers’ deposits in huge vaults and provide services such as check-clearing and ATMs.”
——————-
Oh lord, point 2 is so badly wrong, it is no wonder few people can take Austrian analysis of banking seriously.
No, the bank as a modern institution of capitalism has as its primary purpose, not storing people’s money in vaults, but the taking of money from clients as a mutuum loan. The bank is your debtor and in return it offers to repay you the debt it owes to you on demand or at set dates. That includes repaying the debt it owes you by means of check-clearing and ATMs.
Your “bank account” is merely an IOU, not a bailment. When you hand money over to a bank, the money becomes the bank’s property, and you become a creditor.
Thus the words in bold in point 2 are utterly wrong.
Historically too, there is so little evidence that people really want to store their money in some vault and pay fees to do this yet get no return at all on the money.
If that wasn’t a strawman I don’t know what is.
Do you recognize what you did when you write in respons to Bob “…the bank as a modern institution…” ?
Murphy says: “Let’s start with the basics: There are two functions that banks serve”.
If he is not talking about real world banks, then what is he talking about?
Purely imaginary banks that exist only in the Rothbardtopia?
Would you also have said that to abolitionists of the slave trade when they had said that all men should be free and should have equal rights?
LK, you may disagree that such a bank, as Bob envisions it, is possible, but mocking that view merely as utopian or unrealistic because it does not exist today or strawmanning it is not enough.
Skylien, when Bob store strawmen in a warehouse, does the warehouse pay him or does he pay it? When you put money in the bank does it pay interest or do you? Still think a bank is just a warehouse?
First you do know that I did not defend Bob’s view, I just made clear that LK’s argument does not work.
Secondly in so far as it is on topic. You pay the warehouse (bank) of course, and the bank pays you interest, I don’t know why you think that I shouldn’t know that or what you want to say with it.
However as you may see my lamentation below about low interest, even modern banks perform the function of safekeeping. Just not literally in vaults.
The need of people like me to have your money safe from robbery allows the banks to pay you less interest than they would need to pay as if no such need would exist.
So I am still paying the bank for keeping my money “safe”, and in today’s world of ZIRP and NIRP, even literally via inflation. Or what do you think who actually pays for interest on excess reserves and central banks overpaying for (junk) bonds/ABS?
And even today this is wrong. My money currently is in the bank for basically ZERO interest. I might as well have it at home under my mattress (thanks to Draghi), however I am not doing that, why do you think that is?
But I guess, again, I don’t count as example…
LK, to clarify. Is your point about mutuum loans codified in law and has it been so for centuries? Is it part of the chartering of banks in countries like Canada? Is it part of how texts on banking explain banks? Did older texts say the same thing? (I know the answers, but readers here appear not to.)
The basis of banking in Western civilisation ever since the ancient Roman republic has been the mutuum contract, not bailment, in terms of both banking law and practice.
Indeed the very word “mutuum” is of course Latin and medieval and modern Europeans took their banking legal framework from ancient Roman law:
http://socialdemocracy21stcentury.blogspot.com/2014/07/rothbard-on-deposit-banking-critique.html
http://socialdemocracy21stcentury.blogspot.com/2014/07/carr-versus-carr-1811-and-history-of.html
http://socialdemocracy21stcentury.blogspot.com/2014/07/mutuum-versus-bailment-and-banking.html
http://socialdemocracy21stcentury.blogspot.com/2014/07/a-critique-of-murray-rothbard-on.html
http://socialdemocracy21stcentury.blogspot.com/2014/08/henry-de-bracton-on-mutuum-contract.html
The answers are explained in this book, with reference to ancient law and case history.
http://mises.org/document/2745/Money-Bank-Credit-and-Economic-Cycles
In a nutshell: ancient banking had a 100% reserve requirement by law, but no requirement to give back the exact same coins deposited. It was treated the same as a grain elevator today. Many bankers got away with dodging around this requirement, but when hauled up by the law for failure to pay back a deposit, the legal expectation was that the banker has no excuse. Can’t pay? Off to the salt mines.
“In a nutshell: ancient banking had a 100% reserve requirement by law,”
No, Tel, that is utter rubbish.
On ancient Roman banking and the mutuum and depositum, Huerta de Soto has no idea he is talking about. See here, here, and here.
The point that Huerta de Soto makes, which you are carefully avoiding is that we have Roman case history of bankers taking deposits, promising to pay on demand, and then at a later date being unable to pay when that demand is made. The punishment tended to be severe, so although Roman law did not impose audits of bank reserves, it did impose a firm duty for the banker to keep a promise and always be able to pay on demand.
Implicitly this imposes a 100% reserve requirement for all “on demand” deposits. Any bank with weak reserves will eventually come unstuck, and they did regularly come unstuck, throughout history, just as they are facing a similar problem today.
The difference is that today the bankers can shrug and demand government look after the problem, while in Roman times they would have been punished for failure to keep their agreement.
No, Tel, the Roman law codes and case histories do NOT state that bankers must keep “100% reserve requirement by law” but have “no requirement to give back the exact same coins”.
You — like Huerta de Soto — have no idea what you are talking about.
Cite me just ONE of these imaginary law codes or case histories.
You do understand, I hope, that the example from your own page shows a situation where greater that 100% reserves are kept?
How many more chickens are in reserve here?
The neighbour could just as easily have a chicken bank and owe a total debt of 20 or 30 chickens, with a chicken “reserve” stock of 12.
There is NOTHING in Roman law that says that chicken “banks” or normal banks could not operate on fractional reserve.
In any case, my example is to refute the absurd view that the mutuum must involve loans with set time periods — which is another error of Huerto de Soto.
As I have been saying for quite a while, it is possible for the FRB banker and depositor to come to an agreement. The problem comes about because the bank issues notes which BY THEIR TERMS are virtually identical to warehouse receipts (and I understand the difference between a warehouse receipt for a PARTICULAR coin vs. a note promising a particular amount of coin). If much of the deposits have been loaned out (as envisioned by the banker and depositor in their agreement), the payee of a note promising immediate payment from those deposits should know this and it should be stated in large font on the face of the note. It is telling that the advocates of FRB viciously attack this proposition which is merely aimed at transparency and the avoidance of fraud. Further, I suspect that a “truth in FRB notes language” rule would significantly impair their use as liquid money (as opposed to a less secure form of commercial paper). That makes the pro-FRB types get really upset.
http://factsandotherstubbornthings.blogspot.com/2012/07/bob-roddis-makes-bad-argument.html?showComment=1342711388945#c3957944063574219509.
“The problem comes about because the bank issues notes which BY THEIR TERMS are virtually identical to warehouse receipts”
They are not “virtually identical to warehouse receipts”.
The bank in its standard contracts NEVER promises to store your money as a bailment. It NEVER promises to keep 100% reserves against the debt it owes you.
It takes your money as a loan and promises to repay you on demand.
And despite your ignorance private banknotes through history state that they are debt instruments/IOUs, not bailment certificates, usually through the words “we promise to repay on demand” or words to that effect.
E.g., one of earliest goldsmiths note issued by the London banker Feild Whorwood in 1654:
“Recd [i.e., received], ye [the] 16th [December] 1654 of Sam Tofte the some [sum] of Twenty five pounds w[hi]ch I promise to repay upon Demand I say R[eceived]
P[er] me*
Feild Whorwood
interest of both £2-05-0.” (Melton 1986: 101).
* = by me.
————
The word “repay” means this is debt owed, not bailment.
Obfuscating again, I see. I just said:
(and I understand the difference between a warehouse receipt for a PARTICULAR coin vs. a note promising a particular amount of coin).
Again, the point is getting paid in undifferentiated coin from a) the total deposited stash or b) only the partial stash because the rest has been loaned out. I’m proposing HONEST LANGUAGE on the note. The notes you describe (which is exactly how I understood them to be) DO NOT have honest language on their face.
You are simply confused.
The bank does NOT repay you back from original “deposit” (which is reality is a mutuum loan of money).
It repays you back from its total reserves.
Thus the demand that the note should state that it is only repaying from “the partial stash because the rest has been loaned out” makes no sense, and does not even describe what banks do.
What banks “do” is create new liquid money out of nothing, something average folks cannot do. Those notes should not pass in commerce without an explicit warning on their face stating that they are different than a 100% reserve note (which is different than a warehouse receipt). If people then want to accept them as the equivalent of liquid cash, that’s their problem.
People can all agree to engage in fractional reserve coat checking (where the coat-check girl loans out 95% of the coats during the play), but this requires a meeting of the minds by all participants.
This is a better link to the delightful comment I was referencing:
http://tinyurl.com/pzqhk9t
And you have never answered the plain facts staring you in the face in that comment:
“You think people are so stupid that they can’t recognise a debt instrument when they see one? E.g., they can’t distinguish a cheque from a gold coin?
This is typical blathering from someone ignorant of capitalism’s history: time and again the market invents debt instruments like cheques, promissory notes, bills of exchange, and so on, because the benefits and advantages of such instruments.
Most people who normally deal with such debt instruments are perfectly well aware of the risks. Why do we see “no cheques accepted” signs in many businesses?”
There is no reason why a note should be promising immediate payment of coin that may not be available. Even if EVERYONE understands this (and we know from our non-political Facebook friends that this is certainly true!), I fail to see how repeating the [alleged] obvious can hurt.
The reference to the refusal to takes checks is interesting. I think more people would refuse to take “truth in language” FRB notes than would refuse to take checks.
“There is no reason why a note should be promising immediate payment of coin that may not be available”
The clue’s in the word ‘payment’.
Bank notes are ‘promises to pay’, i.e. debt instruments.
Payment entails transferring property from one owner to another. The bank pays you with its property, which then becomes your property. This is why we say “repayment of a debt”.
If a bank note was a receipt for money stored in a safe deposit box, the money thus stored would still be your property, and so the note would not specify payment from the bank to you on demand.
You completely miss and misstate the point.
I’m shocked.
you think a note which promises payment from a bank to the note bearer should state that the bank always has in its possession exactly the amount of money at all times to pay all of its debts?
That’s what a personal check promises, that the money is really there RIGHT NOW, not that the maker will probably have the money in the bank in a few days or so.
I find it amazing that the statists, who constantly claim to be worried about fraud in the market, so strenuously object to simple, inexpensive and clear contractual language in a situation that is so fraught with potential for individual and society-wide problems.
They are just the hostiles. Just cuz. No no no no no no to everything. No to the NAP, no to voluntary exchange and no to clear contractual language on FRB notes. Just cuz.
If, as the statists insist, EVERYBODY would understand in a no-FDIC/no legal tender AnCap environment the difference between:
a) warehouse receipts for specie;
b) 100% reserve notes for an amount of species;
and
c) FRB notes for an amount of specie that read EXACTLY the same as b) above;
What possible harm could there be in making the distinction between b) and c) explicit on the face of the notes?
List ALL the catastrophic problems that this would cause.
Checks are not mutuum bank accounts.
Banks do not need to hold 100% reserves against their debt claims when in practice only a fraction of the debts owed are ever recalled every day.
You simply do not understand banking. Full stop.
Banks do not need to hold 100% reserves against their debt claims when in practice only a fraction of the debts owed are ever recalled every day.
Then nothing bad can happen from clarifying language on the note, can it?
There’s a very clear implication that the bank should be both willing and able to pay on demand. If the bank is ever caught unable to do this then clearly the bank is the fraudulent party.
“If the bank is ever caught unable to do this then clearly the bank is the fraudulent party”
If the bank promises to pay a sum ‘on demand’ and is for some reason unable to do so, as per the contract, this would constitute a default on the part of the bank. Default on a contractual debt is not fraudulent.
So Tel’s theory seems to be, Roman Law explicitly forbade The kind of deposits inherent in FRB whilst concerning itself with details that only make sense with respect to mutuum loans, and yet many banks flourished by “fraudulently” flouting these laws.
LK’s links rebutting de Soto are very impressive. But beyond that, why would banks seek depositors if the deposit represented only a burden, not an opportunity? Yet banks do and did, even in the classical age.
What I actually said was that it worked “like a grain elevator” which is the example Rothbard tended to use. Strange that we can have a perfectly workable law right now which allows fungible goods to be warehoused, but somehow it must have been beyond the ken of any Roman to comprehend such marvels.
Actually, those banks that flouted their reserve requirements tended to sooner or later get caught out, and the banker found himself harshly punished. Probably some got away with it, but no legal system is perfect, especially when it comes to the practical detail of enforcement. It would be unusual to say the least if the ability for some people to break the law and get away with it, became the standard for what is legal.
There are of course tradeoffs between law making and law enforcement, just as most things involve tradeoffs. I’m sure that creative Libertarians could come up with sensible mechanisms for handling this, once the general principle was established.
I quite clearly stated the example that Rothbard used which was a grain elevator. The reason for stating this was firstly in the hope that you might read it and think about it a bit, but beyond that it demonstrates that right now we can have existing laws that cover the warehousing of fungible goods.
Imagine that, we can figure out how to “make sense” of such a situation, so there’s a tiny chance the Romans might have also been able to come up with something similar. I guess that puts paid to your “only make sense with respect to mutuum loans” theory… you know the bit where a tangible observation contradicts the theory, so we kind of have to accept the observation is real and the theory needs fixing.
Under modern law it is fraudulent if there were risks known to one party and not disclosed to the other party. For example, trading while insolvent is fraud.
However, the question was about Roman law and de Soto does cite examples were people were punished for this under Roman law.
Historically it is easier to fool people into losing their purchasing power via inflation.
Such wisdom, LK…
you don’t have to be a safe deposit ‘warehouse’ to provide services such as check-clearing and ATMs.
Btw, banks do offer the option of storing cash and other valuables in safe deposit boxes, but not that many people do it.
Where I live, fireman literally get cats out of trees. They also trim trees that have fallen. They also remove the tops of complex grain elevators that have been tilted by windstorms. There are others things they do, all of which seem like something a private contractor should be doing. They seem wasteful to say the least.
I think this 1 may take the cake.
http://www.denverpost.com/breakingnews/ci_26385009/ice-bucket-challenge-goes-awry-firefighters-hurt
Philosophy is primary.
http://blogs.scientificamerican.com/cross-check/2014/08/21/quantum-gravity-expert-says-philosophical-superficiality-has-harmed-physics/
I read the article you linked.
I think if there was a small level tax of no more than 3%, this would halt nearly all frivolous endeavors.
Most scientist would disappear, unless they produced tangible and marketable results.
Currently, quantum physics and origin theories really are no more better than the religion and God he denigrates.
Simply unprovable ideas regarding who we are, where we came from and where we are going. Some people do this on their knees, others do in with a microscope, some do it with a telescope and the big spenders do it with a large hadron collider.
It is all just speculation.
“Most scientist would disappear”
Is that supposed to be a good thing?
Absolutely.
why.
Because everything worth knowing is contained in (pick one) the Bible, the Koran, Human Action.
I’m guessing not the qur’an.
Bob,
“Yet Tamny went too far when he claimed that FRB is a tautology; it isn’t”
But you didn’t actually describe a 100% full reserve system. In the hypothetical banking system you described, time deposits or savings deposits and other such bank liabilities are not backed by reserves. The system you described is actually a fractional reserve banking system, where only checking deposits are backed 100% by reserves.
This was Tamney’s point:
“Banks aren’t in business, nor could they remain in business if they simply warehoused money. Instead, they borrow money from depositors seeking a return on their savings, and who don’t need access to their savings right away, only to lend the money borrowed to individuals who do need it right away.”
Philippe,
Did you really read the article?
That’s because “time deposits” aren’t accessible to the original depositor until the specified contractual date. At that time, the “time deposit” is returned to the original depositor with interest; the bank no longer has ownership or access to these funds; and hence, there is no need to speak of a reserve percentage since the ownership of the money is fully transferred and not simultaneously accessible by both parties. Also, during this loan period, the borrower from the bank (and ultimately from the saver) will most likely keep some of this money in the bank in the form of a checking account which will be backed by 100% reserves, and so we still have a bank that is providing time deposits or savings deposits while also maintaining 100% reserves.
Yes, most likely banks would find it advantageous to also offer its services as an intermediary between savers and borrowers, especially since it will tend to have many more opportunities than most business since it deals directly with customers with monetary needs. However, this doesn’t mean that customers who use banks will necessarily want all of their money to be used for investment; they may also want to use banks for storage services for cash balances which they are undecided about whether to allocate to consumption or investment or to what specifically they want to consume or invest in. Banks can then still earn profits similar to all other businesses by charging savers at least a rate that corresponds to the going rate of interest throughout the rest of the economy; they can still earn profits at the going rate of interest without pyramiding on top of their checking deposits, and they can still earn profits by chagring a rate of interest on checking deposits. Or, perhaps these banks may offer free checking service promotions in order to get you in the door so that they may attempt to sell you some of their investment or time deposit services.
And can it be known a priori that banks could not stay in business if they acted only as warehouses? Why is it that non-banking warehouses can stay in business?
Thanks Ben B. He’s right Philippe, you missed the whole point of the article. Look, if I buy a corporate bond, and the company uses the money I gave it to (say) help finance a new factory, that’s not an example of “fractional reserve banking.” By the same token, if I buy a bank CD, and the bank uses the money I gave it to (say) make a loan to a corporation that’s building a new factory, that’s not an example of fractional reserve banking, either.
And the belief that bank loans must also be conducted with a set date/maturity goes against over 2000 years of capitalism.
The callable loan is — and always has been — a fundamental private business practice and, with the use of fractional reserves, the basis of banking. The callable mutuum contract that is the basis of this is not fraudulent.
This is why — in the end — Rothbardians are anti-capitalist.
LK,
So Rothbardians are anti-capitalist because they would ultimately destroy banking?
What’s your definition of capitalism? Why couldn’t a non-banking society also be a capitalist one? Or, why couldn’t a non-monetary society also be a capitalist one?
They are anti-capitalist by
(1) their own criterion of being vehemently against restrictions on free, voluntary, non-fraudulent private exchanges/contracts and
(2) their demand that FR banking be outlawed or curtailed, because, despite Rothbard, FR banking is not fraud.
Anyone who borrows short and lends long is a “bank”. The proscription of FRB is precisely a limitation of the freedom to contract. If there are no false pretenses there is no fraud.
It’s only fraud when paper that is actually “fiduciary media” masquerades as a note for a 100% reserve of specie.
No one has yet even attempted to explain the problem with each type containing clear language differentiating these two very different types of notes and written agreements.
Is it possible for someone to do that without making an insult?
“that’s not an example of “fractional reserve banking.”
no, because in your example no bank is involved.
If you lend money to a bank and the bank lends it to someone, then the bank has liabilities which are not backed by reserves, but are backed by the loan it made. This is an example of fractional reserve banking.
if the loan defaults in this case, the bank might not be able to pay the depositor, or it might have to borrow to do so.
The fundamental weakness of fractional reserve banking is not that depositors suddenly find out that their deposits aren’t 100% backed by cash reserves in the bank’s vault. The fundamental weakness is that people can default on debts and asset values can collapse.
The weakness is that deposits are “at call” and can be demanded any time, while the loans backing those deposits are not. Eventually there will be a situation where too many deposits are called on the same day, and the bank will have to refuse… and then you have a problem.
why would too many deposits be called on the same day?
Could be any reason, or just coincidence, but at any rate sooner or later it will happen.
Right. That could happen. That is a bank run. The fact that we have a term for it means it’s not a new thing. Which means FRB is not a new thing.
“Could be any reason, or just coincidence”
not really. Bank runs haven’t happened for coincidental or any old reason.
Why do you think Apple stock collapsed tomorrow?
Any old reason? Coincidence?
you might say that panic is endemic to market economies, and sometimes people just go crazy and panic and everything goes wrong.
But that wouldn’t serve as a good basis for arguing later that market economies are so rational and good etcetera.
That is, I admit, one of the weirder questions I have been asked. Unfortunately, I’m not a time traveller, and if I was (will be) I’d probably be making note of lottery numbers or horse races.
Who brought panic into this?
Any time you have random events such as deposits being called upon, you will have a situation where a significant proportion those events coincide on the same day.
Actually, the reality is much worse than random events, because correlation is common in an economy (as the MBS traders discovered). An external event can trigger many people to take similar actions at about the same time. The exact cause for this is irrelevant. The banker remains under contractual obligation to pay on demand, regardless of the external circumstance causing depositors to call on their savings — be that panic or otherwise.
I believe the original question was whether it was legal under Roman law.
Philippe,
“no, because in your example no bank is involved”
Doesn’t the corporation also have unbacked liabilities in the case of the corporate bond? What happens if the corporation has overvalued its future assets and is unable to pay the bond buyer when the bond matures?
default can of course occur in such a situation.
So then it’s a non-banking fractional-reserve corporation?
though it might be able to borrow to pay existing debts as they fall due.
Checking account balances are bank debts which are rolled over on a daily basis. In a worst case scenario banks may be unable to roll over debts and so be unable to pay depositors. This is when credit markets freeze up and banks can’t sustainably borrow at the going interest rate.
Why is it fundamentally different in the situation of the corporate bond and the bank loan? Either way, both investments are “unbacked”. Why does it matter that the bank’s liabilities are “backed” by a loan to someone else, while the liabilities of the non-banking corporation are essentially “backed” by a “loan” to factors of production?
They both have unbacked liabilities, according to you, so I’m not sure why you wouldn’t also call the non-banking corporation a fractional reserve one.
“Why is it fundamentally different in the situation of the corporate bond and the bank loan?”
fundamentally they’re basically the same. However banking is a bit more complicated as it pools all sorts of different borrowers and lenders.
“fundamentally they’re basically the same.”
Well, I think that’s Dr. Murphy’s point. Ultimately, reserves are only relevant for deposits where the full ownership of the money has not been transferred from the depositor to the bank, such as with demand deposits. In the case of the loan to the bank and the corporate bond, the full ownership of the money has been transferred to each.
“reserves are only relevant for deposits where the full ownership of the money has not been transferred from the depositor to the bank, such as with demand deposits”
But in the case of a demand deposit, ownership of the cash deposited has been transferred to the bank.
If the bank can’t for some reason redeem a demand deposit as per the contract, that would simply be a case of defaulting on a debt.
“But in the case of a demand deposit, ownership of the cash deposited has been transferred to the bank.”
Not under a 100% reserve system, which is what I thought we were assuming from the get go when you said,
“But you [Bob Murphy] didn’t actually describe a 100% full reserve system. In the hypothetical banking system you described, time deposits or savings deposits and other such bank liabilities are not backed by reserves. The system you described is actually a fractional reserve banking system, where only checking deposits are backed 100% by reserves.”
Hence, if the demand deposits are backed by 100% reserves, then the ownership of the money has not been transferred from the depositor to the bank.
“Not under a 100% reserve system”
I think you’re referring to a safe depository or safe deposit box system.
In the case of a safe deposit box, the money placed in the safe remains the property of the person paying for the safe. In this case there is a clearly defined contract between the customer and the company providing the storage service, which includes a fee, usually based on the amount of space required by the customer.
“Hence, if the demand deposits are backed by 100% reserves, then the ownership of the money has not been transferred from the depositor to the bank.”
It is (in theory) possible to have a bank which offers deposit accounts which are 100% backed by vault cash, in which the vault cash is still the property of the bank, until the depositor demands repayment. In such a case, the 100% reserve backing would be like a guarantee.
Corporate bonds are not redeemable “at call” so if the corporate is profitable in the long term, the bonds will get paid, and the bondholder gets what was promised.
There’s a separate problem which is limited liability, and that covers the situation where the corporation is not profitable, but the bondholder can see clearly written on the bond that limited liability is in force here. The risk is explicitly stated.
Philippe wrote:
“that’s not an example of “fractional reserve banking.”
no, because in your example no bank is involved.
This is fun! Let’s take it one more step, Philippe. Suppose a corporation issues a one-year bond at 5%, and then instead of using the money to build a factory, instead the corporation lends the money to a small business owner for one year at an interest rate of 7%.
You would say that this isn’t fractional reserve banking, right, because no bank is involved?
Then, once you answer that, tell me how that is economically in any way different from a building with the four letters B-A-N-K on the wall doing the exact same transactions. Instead of calling it a “corporate bond,” though, they call it a “bank CD.”
“You would say that this isn’t fractional reserve banking, right”
You were the one that said it isn’t fractional reserve banking. I agreed with you, because no bank is involved. You said:
“Look, if I buy a corporate bond, and the company uses the money I gave it to (say) help finance a new factory, that’s not an example of “fractional reserve banking.”
I think we might be miscommunicating here, or malcommunicating perhaps.
“Suppose a corporation issues a one-year bond at 5%, and then instead of using the money to build a factory, instead the corporation lends the money to a small business owner for one year at an interest rate of 7%”
can I clarify whether you think this is or isn’t an example of fractional reserve banking?
This is a good one. IMO, this thread highlights the importance of coming from a praxeological understanding.
I think if we take Philippe’s reasoning to its logical conclusion, then we would be saying that all human action is fractional-reserve action because there is no guarantee of a return; our actions are unbacked and there is no redo button.
“all human action is fractional-reserve action”
I don’t think I’ve said that or implied that anywhere. Perhaps you could explain why you think you believe that is my position.
Did you really read the article?
yes.
Sorry, I wasn’t trying to be sarcastic. I assumed that you had just skimmed the article for excerpts to support your own viewpoint. I was probably just projecting some of my own bad habits.
“there is no need to speak of a reserve percentage since the ownership of the money is fully transferred and not simultaneously accessible by both parties”
In an unregulated banking market, shouldn’t the interest rate on deposits, in theory, change to bring about an equilibrium between the desires of depositors and borrowers?
I don’t see what your question has to do with what you quoted.
the interest rate on deposits should in theory change to bring about a situation whereby people are willing to hold deposits rather than cash.
If everyone wants to withdraw their cash at the same time, interest rates on deposits should in theory rise until people are willing to hold deposits again instead of cash.
However reality isn’t so simple.
Are you suggesting there would be a market clearing price?
Tamny, in his article claims that Austrians are completely wrong about the Money Multiplier effect. Claims it is a logical impossibility.
http://www.forbes.com/sites/johntamny/2014/08/17/the-closing-of-the-austrian-schools-economic-mind/
Mish in his rebuttal article titled “Idiot’s Guide to Austrian Economics” attempts to take apart Tamny’s article, but AGREES completely with Tamny that there is no such thing as the Money Multiplier.
http://finance.townhall.com/columnists/mikeshedlock/2014/08/20/idiots-guide-to-austrian-economics-n1880752
When I run through the standard money multiplier example, the math still works, and as M1 is considered money, I conclude the money multiplier seems a valid mechanism.
Question(s): Does the money multiplier effect exist? Why would Tamny and Mish state that it doesn’t exist? Do they mean that it has potential but that other factors heavily outweigh the MM on how money actually is created? What?
I’m confused by this. Please: Brainiacs to the rescue!
Can a bank with branches ever pass muster for Bob Murphy or Tel? I deposit $100 in the Detroit branch, but might want to withdraw from the Toledo branch. So both branches must have the cash? This is clearly impossible. It is no answer to say they only need enough in each branch to cover a likely withdrawal, as that is a fractional reserve. It is no answer to say the bank has assets to cover its debt to me, so do FR banks in the form of loans. The multi branch bank could lose the money in transit, so cannot be said to be at no risk of default.