David Hume Loves 100% Reserve Banking
I’m not sure I fully appreciated this when I read it as a young lad:
II.III.4
This has made me entertain a doubt concerning the benefit of banks and paper-credit, which are so generally esteemed advantageous to every nation. That provisions and labour should become dear by the encrease of trade and money, is, in many respects, an inconvenience; but an inconvenience that is unavoidable, and the effect of that public wealth and prosperity which are the end of all our wishes. It is compensated by the advantages, which we reap from the possession of these precious metals, and the weight, which they give the nation in all foreign wars and negociations. But there appears no reason for encreasing that inconvenience by a counterfeit money, which foreigners will not accept of in any payment, and which any great disorder in the state will reduce to nothing. There are, it is true, many people in every rich state, who having large sums of money, would prefer paper with good security; as being of more easy transport and more safe custody. If the public provide not a bank, private bankers will take advantage of this circumstance; as the goldsmiths formerly did in LONDON, or as the bankers do at present in DUBLIN: And therefore it is better, it may be thought, that a public company should enjoy the benefit of that paper-credit, which always will have place in every opulent kingdom. But to endeavour artificially to encrease such a credit, can never be the interest of any trading nation; but must lay them under disadvantages, by encreasing money beyond its natural proportion to labour and commodities, and thereby heightening their price to the merchant and manufacturer. And in this view, it must be allowed, that no bank could be more advantageous, than such a one as locked up all the money it received,*25 and never augmented the circulating coin, as is usual, by returning part of its treasure into commerce. A public bank, by this expedient, might cut off much of the dealings of private bankers and money-jobbers; and though the state bore the charge of salaries to the directors and tellers of this bank (for, according to the preceding supposition, it would have no profit from its dealings), the national advantage, resulting from the low price of labour and the destruction of paper-credit, would be a sufficient compensation. Not to mention, that so large a sum, lying ready at command, would be a convenience in times of great public danger and distress; and what part of it was used might be replaced at leisure, when peace and tranquillity was restored to the nation.
The 18th century was known for its love of barbarous relics like full-reserve banking, classical liberalism, and slavery.
The 18th Century was the height of the abolitionist movement… at least in Enlightenment Christian nations. Most of them finalized abolition by the early 19th Century.
Other parts of the world continued with slavery for some time afterwards, most of the Middle East hung onto slavery until the early 20th Century. Certain unpopular elements still maintain the practice today.
classical liberalism = barbarous
Yea, it’s terrible, humans running around free, choosing to trade with each other voluntarily instead of killing each other with impunity.
The /s tag is an ugly scar on any comments section. Let’s just assume the best about one another.
Rothbard was always chirping about how enslaved the modern mind is to the Whig or Marxist vision of history, one where we’re constantly marching forward and triangulating toward truth, and I can’t think of too many fields where it’s worse. Maybe political science. The idea that sophisticated modern intellectuals with all our data and technology and statistical gizmos may not understand something that 18th-century liberals recognized and which their intellectual descendants then neglected and ultimately forgot is so offensive that only a boor and contrarian would even suggest it.
Naturally, Hume was right, just as Madison and Jefferson were right about the nature of the state and the need to bind it in the chains of the Constitution.
(1) ” A public bank, by this expedient, might cut off much of the dealings of private bankers and money-jobbers; and though the state bore the charge of salaries to the directors and tellers of this bank”
He is also calling for 100% reserve “public banks” where salaries are paid for by the government. Did you read that part?
(2) 100% reserve is a bizarre fantasy that would crash modern capitalism, and even early modern capitalism, because capitalists have always needed an endogenous money supply that increases to meet the demands of trade and industry, and in this period that was just as often done by private bills of exchange or promissory notes, which do not at the time you write have to backed by 100% cash reserves, and so expand the money supply. Are you going to ban those too?
I assume that the problems in FRB with the contract between the banker and depositor can be resolved. The problems of fraud arise between the payee of an FRB note and the bank.
1. A real “dollar” is a coin containing 371.25 grains (troy) of fine silver.
2. A firm can issue a warehouse receipt for a specific real dollar.
3. A firm can issue a bearer note for any real dollar in storage with 100% reserves.
4. A firm can issue a bearer note for any real dollar in storage where the issuer knowingly does not have 100% reserves to cover all of the notes issued.
5. Note #4 (which is really nothing more than a written contract, like the others) must state on its face that it is not the equivalent of #2 or #3 so that the payee is not misled. If such “truth in FRB notes” are accepted for use by the public, they would necessarily pass at a discount from #1, #2, and #3. Regardless, there would be no fraud.
6. Historic FRB has passed off #4 as the equivalent of #1, #2 and #3. That is both misleading and fraudulent because those notes are improperly called and treated as “dollars”. Whatever you might want to call #4, it should not be called a “dollar”. In fact, #2, #3 and #4 should not be called a “dollar”.
“(2) 100% reserve is a bizarre fantasy that would crash modern capitalism, and even early modern capitalism, because capitalists have always needed an endogenous money supply that increases to meet the demands of trade and industry …”
It’s not capitalism that would crash, but artificially propped up sectors that have made malinvestments.
The money supply does not need to increase to meet the demands of trade: producers will simply reach their individual productive capacities, consumer demand will raise the price of the goods produced with existing capacity, and only then will it be profitable to expand production without causing malinvestments.
An endogenous money supply simply takes the losses that would have accrued to producers engaged in malinvestment and spreads those losses onto others.
Producers are limited in their productive capacity by the value that consumers place on the final goods, unless they’re going to rob others of the funds to do so.
The goal is not to produce, per se, but to satisfy consumer preferences. To do otherwise is to malinvest resources.
Excellent response. I notice the OP has yet to rebut.
Supposedly there is fine line between genius and schizophrenia.
The same can be said for capitalism and bubblism. There is a fine line.
( I get credit for the new term bubblism:-)
“… and in this period that was just as often done by private bills of exchange …”
Which were naturally limited by bank runs.
“… or promissory notes, which do not at the time you write have to backed by 100% cash reserves, and so expand the money supply.”
A promisory note is not money or a money substitute, but, rather, a contract.
“Are you going to ban those too?”
Bank runs would naturally limit their use.
The goal isn’t to produce, but to satisfy consumer preferences. Producers need to be better forecasters of consumer demand.
Demand can never logically be deficient since consumer demand is the reason for production. Stop producing that for which consumers haven’t expressed a desire, or selling at a price for which they haven’t expressed a desire.
“Which were naturally limited by bank runs”
That is rubbish. Bills of exchange and promissory notes often tended to be used within merchant communities, without banks being involved.
Oops. Yep. I took “private bills of exchange” to mean private bank notes:
Introduction of Bill of Exchange
https://en.wikipedia.org/wiki/Negotiable_instrument#Introduction_of_bill_of_exchange
Bills of exchange aren’t money, either, though. They’re also contracts.
Except for the “endogenous money” nonsense, I agree with Selgin.
Wait… that’s LK?!