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.
What Changed?
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.
I noticed you included the daily bell as an influential site... unless I've misread them, I'll have much more to say about that decision of yours. Also, a quick read tells me you have failed to understand the nature and consequences of debt-money... so, when I have more time to read your stuff, I'll be back to comment.
ReplyDeleteIf a FRB bank note is identical in its language to a 100% reserve in specie note, I say there is fraud on the payee. Put the proper contractual language and warning labels on the FRB notes (which is nothing more than a written contract) and see if people accept them at par with 100% reserve notes or warehouse receipts. If they do, there's no fraud. I suspect they would be discounted. But we won't actually know that until we establish AnCap, will we?
ReplyDeleteThe fact that these arguments continue says to me that we are dealing with an ambiguous legal situation about which potential payees should be well informed by the language on bank notes.
Bob
DeleteThank you for the thoughtful post.
“If a FRB bank note is identical in its language to a 100% reserve in specie note, I say there is fraud on the payee.”
I agree.
“Put the proper contractual language and warning labels on the FRB notes (which is nothing more than a written contract) and see if people accept them at par with 100% reserve notes or warehouse receipts.”
I don’t believe it is necessary that the note identify what it is, as long as it doesn’t lie about what it is. In other words, silence does not equate to fraud. If a market participant willingly accepts notes that do not describe what it is, who am I to attempt to stop this transaction?
“If they do, there's no fraud. I suspect they would be discounted.”
Why is there no fraud only if they are not discounted? If there is no fraud, there is no fraud. The value of the object is not guaranteed.
“But we won't actually know that until we establish AnCap, will we?”
We won’t know (but can have a good reason to suspect) until the monopoly / cartel protection is removed. A free market in money / credit / banking / currency will allow these questions to be answered.
Not AnCap, but much better than what we have today.
I believe the discounting of the notes would signal savviness on the part of the discounters. This represents knowledge on the part of the participants, and somewhat discounts the idea that there is fraud happening. Just some thoughts.
ReplyDelete