Recently I decided to jump into the latest Austrian discussion about fractional reserve banking (FRB). John Tamny wrote a post critical of those Austrians who regard it as a fraud; Mike Shedlock responded with a rebuttal. I decided to get in the middle of it – not that I haven’t been clear in the past regarding my position on this matter.
There are some aspects of this topic of which I have thought (and written) about a great deal; there are others that I have not found worthwhile to think very much about. Unfortunately, I decided to make statements about both in my post – and then followed it up with a more detailed post on the topic upon which I have not spent much time.
What I Know
There are two things of which I am quite confident regarding FRB: first, as it is practiced today it is not fraud; second, markets are well capable of regulating bank leverage.
Once I felt settled on these two points, I decided not to spend any more time thinking or writing about the finer points – there is no violation of property rights, and the market can regulate the business practice: anything else I might have to say about it seems superfluous in the face of this.
What I Should Have Left Alone
Tamny made a point about the money multiplier. It resonated with some background-noise-thinking that is always going on in my brain on some topic or another. Unfortunately, I decided the background noise was developed enough to actually put into words.
More than one person sent me a note, suggesting I do some further research or perhaps that there was some subtle point I was trying to make that didn’t seem so clear on the surface. That’s when I doubled-down and wrote the second post.
How many times have you had a light-bulb moment? Even on a topic upon which you feel you have some decent knowledge? Something is written in a slightly different manner, or in a context not previously considered, or whatever?
My long-time online friend, gpond, sent me the link to a related article – generally in agreement with Tamny’s position (and mine), and generally in disagreement with Shedlock’s. However, contained in it was a seed – one that in hindsight was so terribly obvious. The seed was a statement about the distinction of currency vs. other forms of “money.”
While I was in the middle of working through a further defensive response to gpond, I found I was not able to write words that made any sense. That’s when the light-bulb went on.
So, despite being perfectly aware that – other than cash withdrawals – banking as practiced today is a completely closed-loop system, my analysis was written as if it wasn’t. I wrote as if every transaction was a cash deposit or withdrawal. But it isn’t. Almost every transaction today – and an even higher proportion of the dollar (or Euro or whatever) volume – is done via some form of electronic means – where a withdrawal in one account is an instant deposit in another.
Am I certain that this was the root of my error? Even now I cannot say that I feel sure about this; I am only certain that my current view is somewhere between “I don’t know” and “I was wrong.”
Perhaps Next Time…
As mentioned, it is enough for my purposes that I have concluded that FRB is not fraud and that the market is perfectly capable of regulating bank leverage.
Perhaps next time I will leave it at this. It is enough.