09
Aug
2010
The Form of Saving Matters
This one is for serious econ geeks. It is another chapter in the never-ending saga of fighting over fractional reserve banking. The best part:
To repeat, [Bill] Woolsey thinks he has answered this objection by telling a story in which the banks do lend money to precisely those firms who would have sold more corporate bonds to the public, in the first scenario. And then Woolsey admits that this is a “heroic assumption.” Does everyone see the problem here? The Rothbardians level an objection, saying the free bankers are ignoring an important real-world consideration, then Woolsey assumes away the problem and declares that he has met the Rothbardian objection.
In this free market for money wouldn’t you think that private businesses would be able to put a check on fractional reserves. I assume that it would be known what a bank had in reserves, and if I knew a bank had, say 80% in reserve, that I could charge 20% more for people to use their notes at my business. Wouldn’t there be a great incentive for banks to be at 100% anyways just to get the most wide use of their notes? I would think that when you remove the protection from the State that banks wouldn’t have much incentive for frb.
Also do the guys like Woolsey believe that grain wharehouses could also operate on this fractional basis or is it they believe money is an exception?
Why would anyone accept notes or private currency from a known FRB? What would the contract between the depositor and the bank say? The money’s either in the bank or you have a time deposit and the money will be there later if the investments work out. I don’t understand the contractual arrangement for the netherland between the two. Walter Block says it’s the impossible situation of two or more people having the simultaneous claim for the same asset.
Bob Roddis, I have not yet read The Wealth of Nations, but it is my understanding that Smith discusses the Scottish and English banking system.
Apparently, in Scotland, the banks issued notes that stated that they would promise to either redeem the note in the enumerated weight of gold immediately, or in 2 months with some stated interest. This second clause was meant to be used by the bank if it suffered of a liquidity problem.
Also, back then, banks had unlimited liability. That is, you could go after the assets of the bank owners if they didn’t make good of their promise. This added to people’s confidence in their notes.
There were some banking crisis, but the Scottish system behaved more resilient than the English one.
I can see the pragmatic arguments against FRB, it seems like it could cause distortions, etc. However I can’t see any ethical way that FRB could be prevented. If people have the freedom to make contracts, then a depositor has the right to accept the terms of an account which lay out that it is a fractional reserve demand account–and he can’t be said to have been defrauded. I could easily see some banks in libertopia offering accounts where the fee is waived (and interest earned?) in exchange for giving up the complete security of full reserves. The contract could specify the minimum fractional reserve ratio (100%, 50%, or 10%) and have the stipulation that in the extreme case of a run on the bank, the depositor may suffer a delay in the ability to access his/her account.
Where do most Rothbardian’s draw the line? Which accounts are ok? Are savings accounts which can be withdrawn at any time ok? What about money market accounts, or negotiable order of withdraw (NOW) accounts, or super NOW accounts? Despite Bob Roddis’s comment, it seems that there are, in fact, a lot of degrees between an investment account where the depositor does not own the money at the time, and a full reserve demand account.