Comments on Free Banking

Detlev Schlichter has written a very thorough post regarding the debate within Austrian circles between free banking and 100% commodity-backed banking.  It is worth reading.

I have commented at his site as well.  Following are my comments:

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I find the first several paragraphs to succinctly describe why free-banking is most consistent with an Austrian and Libertarian view (and why FRB, at least as practiced today, isn’t fraud).

Beyond this, I offer a couple of comments:

“[Free bankers claim] FRB, in a free market, is not only not a source of instability, it is a source of stability as it manages to satisfy changes in money demand smoothly.”

I will break this into two parts: as to the statement of why free bankers claim it is a source of stability (“as it manages to satisfy changes in money demand smoothly”), I offer no comment. However, to the first part – that FRB in a free market is a source of stability seems undeniable. Or more precisely, free banking (and if FRB develops, so be it) will offer the most stability – even more than a 100% commodity standard.

Why? The reason is found in the essay:

“There is no basis for banning FRB, so it should not be banned. This position is, in my view, correct, and it also happens to be obviously libertarian.”

Any action taken to counter free banking can only happen by the interjection of a non-market force – certainly to have a 100% commodity standard would require interjection of a non-market force.

How can force in the market produce more stability (to the extent “stability” is achievable) than market actions would otherwise produce? The best way to achieve stability is to allow prices to communicate freely, allow profit and loss to allocate resources to the most efficient, and to allow actors to act – meaning contract as they like (consistent with NAP, of course).

As a 100% standard can only come about via force, it cannot be more stable than the market.

As to what Mises did or didn’t say about 100% commodity money or gold, I find both Mises (Human Action, Ch. 17, Sec. 12) and Rothbard (The Mystery of Banking, Ch. VIII) to make very eloquent statements about the ability of the market to regulate banking practices.

Whatever else either of them have written or said on this subject (and certainly quotes on both sides can be found), if the market is an effective regulator, I find no reason to butt in.

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For those not familiar with my broader views on this subject, perhaps a good place to start (including the links embedded in the post) is here.