Rothbardians vs "Free Bankers" on Fractional Reserve Banking | Robert P. Murphy
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- Опубліковано 1 лип 2024
- Recorded at the Mises Institute in Auburn, Alabama, on 17 July 2019.
Mises University is the world's leading instructional program in the Austrian school of economics. Mises.org/MU19
I like that word "Fiduciary media"
Fiduciary media consist of the proportion of perfect money substitutes which a bank issues but does not fully back by physical monetary units (i.e. gold or paper money) in their vaults. Fiduciary media can exist in many forms including credit notes, checks or drafts. When a bank increases the amount of fiduciary media in an economy, ceteris paribus, the purchasing power of money will decline.
- from wiki.mises.org/wiki/Fiduciary_media
"Tell me fake money without saying fake money"
I prefer "For-douche-iary media"
Whoever made the video and decided to make the ticker scroll left to right is the real anarchist here
Allowing bankers to lend money that they don't have is the same as counterfeiting money. Congress has power by Artivle !, Section 8, US Constitution, "To provide for the punishment of counterfeiting the Securities and current coin of the United States."
"Counterfeiting is wrong except when we do it," exclaimed the government and bankers unanimously
It doesn't matter what The Constitution says when Congress is in on the scam and doesn't care
Thank you mister Murphy for all these good arguments. This reinforces my conviction that a 100% reserve is a good thing.
🗿
George Selgin proved it isn't the best thing.
@@Tyler-hf4uc even Hoppe, who I love but is not the toughest economist give a beating to Selgin and White.
Look for Money, bank credit and economic cycles by Jesús Huerta de Soto
@@spooner7151 no he didn't. He's also not a serious economist. I don't even think his own field recognizes him for much of anything other than a dogmatist. They aren't wrong either.
Central banks being lenders of last resort only builds up the pressure in the cycle till the point where central banks themselves can no longer withstand the dips and they go under. This triggers much more violent and far reaching economic depressions.
The rise of cryptocurrencies has demonstrated that even after a century of central banking, the market is returning to the wildcat banking era of President Jackson.
Great talk, Bob.
Me: "Wanna trade some gold for a lottery ticket?" Austrian: "You're going to jail"
Individual: Exists
Statist: "You're going to jail"
I would like to open a bank where each person's deposits would stay exactly as it is, no bank bankruptcy
with bitcoin, the bearer instrument and the specie are concepts which are functionally indistinguishable
But, but, how will the banksters manipulate the money supply now?
@@nicholastidemann9384 By arbitrarily determining what amount of bitcoin is used to get whatever you're trying to buy. Bitcoin just trades the same problem for itself
There is nothing wrong with having a choice for consumers of 100% or fractional reserve.
As Murphy said, it is a non sensical contract.
But the effects of fractional reserve banking is inflation. Not all consumers who hold gold agree to the inflationary or boom/bust effects that fractional reserve banking causes.
@@chesterg.791 Monetization of debt causes inflation ,not fractional reserve banking.There is a difference .
@@abramgaller2037 That too. But when banks lend more money than available in their reserves, that's inflationary also. You are essentially expanding the money supply. More money can be lent, than is in supply.
@@chesterg.791 That is monetizing debt .Fractional reserve is lending out money on deposit.
A full reserve bank would be one where their asset maturity is earlier than the maturity of their corresponding liabilities. In other words, their loans must be paid back before they must pay back their depositors. This means that there'll never be a period in which depositors have access to their funds while said funds are being lent out in some capacity. They wouldn't be able to write checks against them, as they're being lent out to ventures that inherently hold some form of risk & are inaccessible for that duration. Nobody would accept said checks - as doing so would inadvertently raise time preferences, thereby introducing systematic risk & hurt the profitability of these projects the banks lend to.
On demand deposits are accessible to depositors at all times, so the bank would never lend them out under a full reserve system. They'd remain in a vault, which depositors can write checks against as they wish. There's no risk here. People would build a healthy balance of more risky, yet profitable, time deposits & on demand deposits which harbor no risk of default.
Let's say a full reserve bank wishes to make a loan that matures in 5 yrs. They can only take from time deposits that mature in 5 yrs or more.
If you go to get your money out of a time deposit at the end of its maturity, you're assured that your money isn't still lent out.
Under this system it would completely eliminate any chance of double spending - where people think they have money in their account, but if everyone goes to cash out they don't actually have it. Bank runs would be eliminated.
Now, banks can still fail under this system. If they make a bad loan that isn't repaid back in full, they're either gonna have to take from their own savings to pay back depositors, liquidate some of their assets to meet their debt obligations, convince another bank that this was just a rare fluke & get a loan, or tap into some form of insurance they (along with other banks) have paid into. Premiums on said insurance would be dependent upon their history of sound finance. If none of the above options prove sufficient & they must default or undergo a haircut on the debts owed to depositors, then they'll undergo standard bankruptcy proceedings. Time depositors would go elsewhere, to banks that practice sound lending, out of fear of losing money. These depositors, like all lenders, would harbor risk.
This is good. It holds banks & depositors accountable for bad bets.
Thank you. Just reading about this in Human Action and was thinking Mises was a Free banker.
Selected Writings of LVM, vol 3: Political Economy of International Reform
Noninflationary Proposal for Postwar Monetary Reconstruction
Page 105
We have to prohibit it
Mises
So if there was no fractional reserve banking, that would mean that all on demand deposits would essentially just be warehoused, correct? And it would also be the case that there would be no incentive for the bank to pay interest, correct? In fact, if anything, the depositor would be paying the bank for the convenience of keeping his money there. Any money lent out by the bank would initially have to be raised by some other means. What would be the means? Similar to raising funds for any other company?
Here's how it could work. Let's say you have 10,000$, and you save them at a full reserve bank. The bank would need to keep the money flowing. It wants to make a profit. They could use their own money SEPARATE from the depositors' money, or they could encourage you to lend them part of your money that you deposited in a IOU, and use that money to lend it out at a much higher rate, pay back the IOU (with interest of course) and at the same time make their money back.
No one ever explains why interest needs to be involved or has to exist at all, other than lazy rent seekers wanting free money that's already fictional anyway
You’re free to put your money in a 100% reserve bank if you want. If you force it by law then banks could go around it, e.g. you put $1000 in a CD deposit then the bank is allowed to lend it, but then a day later you go to ATM to take out $50 then the bank could “lend” you it. From the customer’s perspective there is no difference to the status quo.
The number in your bank account is a liability, not the money you have. It’s a promise of payment. You have a contract with the bank that says that you deposit your money there, and when you want to take it out, they have to give it to you.
its a liability on a banks balance sheet, yes. for the customer, though, its an asset.
a loan would he a liability for a customer and an asset for the bank.
"when you want to take it out, they have to give it to you"
Must be why my bank account has a limit on how much I can take out each day, and which is conveniently _less_ than how much I can put in
I don't understand @26:45 what is meant by "the banks settling up with each other" and one bank having more "claims" on the expanding/low reserve bank, eg. 1000 vs 200 gold pieces owed??
Allow me to explain, Mike. Here is the passage in question:
25:55 - "Mises thought normal market forces would constrain banks so that if any one bank expanded too rapidly by lowering its reserve requirements then there would be adverse clearing with respect to the other banks and so pretty soon the reserves of the one bank that was expanding rapidly. So lets say all the banks in the community have 95% reserves and then one bank gets aggressive and lowers its reserve ratio down to 50%. So its issuing more loans, it's doing more business, it's earning more interest payments, so that looks good. But the point is that bank's customers now they have more notes in their possession, other things equal, than all the other banks' customers do, so in the course of normal operations there's going to be more notes issued by the expanding bank than all the other ones. So at the end of the week or the month when the banks all settle up with each other the other banks are going to have more claims on the expanding bank than vice-versa. And so, on that, they're going to say okay, here, we've got 1000 ounces of gold that you owe us and we only owe you 200 ounces of gold, and so you owe us on that 800 ounces, so go ahead and settle up. And so the point is, the genuine money stock would flow out of that one expanding bank's vaults. So that's why, in equilibrium, no single bank can expand too rapidly relative to its peers."
Currently, Mike, in our monetaristic country, we have all private banks in league with each other and under the aegis of the American central bank: the Federal Reserve. They use fiat currency (inconvertible paper money made legal tender by a government decree), not representative money (a token or piece of paper that has no intrinsic value but can be exchanged on demand for a commodity that does have intrinsic value, such as gold).
Imagine all private banks used representative money (say the gold standard), were unregulated and not dictated to by the Federal Reserve. Imagine one such private bank bank using a lower reserve ratio than all the others (say 50%). Due to this 50% fractional reserve banking ratio (they could lend out 50% more of the value of all their gold in the form of paper money to its customers), they would have more money circulating in the country: more people would be using their money, and more of that money would be being deposited in the other private banks.
At the end of the month, when it was time to settle up, the other banks would demand payment from this one outlier bank and it would be unable to pay as it wouldn't actually have the demanded quantity of gold in its vaults due to its excessive low reserve ratio- this would result in it going bankrupt, and nobody would bail it out.
Justice would be served on this one overambitious private bank thanks to the free market, capitalism, and high reserve ratios.
@@maciej.ratajczak what a great explanation !
I think crypto is the new era of free banking. You become your own bank.. The competition between thousands of programmable monies will drive innovation and prosperity. Money is just a technology for trade. Due to lack of competition from monopolized fiat currencies, the potential for the a free market solution to "good money" is incredible, imo. The pent up demand for good money is everywhere.
I'm not talking about bitcoin. It's slow, and uses a lot of energy. Bitcoin is digital gold, and gold is an outdated technology for transfer of value. In the future, all assets will be tokenized on the blockchain to store and transfer value.
Nice video
There is no sure binding net positive feedback loop on net for banks in a free market raising reserve requirements. You can argue the weakest bank will be forced to raise requirements because other banks and equity investors will not lend to them, but you can also argue that other banks and investors are likely to chase net interest revenue by lending to and investing equity in banks which are growing net interest revenue and net income by lowering reserve requirements. Why is Ally bank a hot stock right now? Why are a number of Indian bank stocks in a bull market? Because risk capital chasing banks who are growing net interest revenue rapidly is a huge driver for bank asset equity and liability expansion in a growing economy.
Or just do away with the money fiction itself and not have to worry about it in the first place
IMHO, between 37:45 and 38:23 Murphy is mis-interpreting the free-bankers (F-Bs) position.
F-Bs are not saying that depositing 100$ into a bank increases savings with respect to holding 100$ under the mattress. Either you keep 100$ under the mattress or you keep 100$ into a bank account, the amount of savings is exactly the same (=100$). Instead, F-Bs say that the amount of loanable funds is different between the two situations. 100$ under the mattress lead to no additional loanable funds; 100$ into a bank account lead to additional (up to +100$) loanable funds. That's it.
The whole point of having more savings is to have more investments via a reduction in the interest rate. Keeping 100$ under the mattress increases savings by 100$, but doesn't lower the interest rate. Instead, keeping 100$ into a bank account increases savings by 100$, increases the amount of money that can be lent, and lowers the interest rate - which is just fine.
F-Bs are just saying that increased lending due to increased savings is perfectly fine - a statement that rothbardians should agree on, too.
Gotta say. I miss the beard.
Why does this debate even exist couldn't both of these systems exist simultaneously? I guess for maximal transparency I'd be a Rothbardian. Wait, why would somebody not prefer 100% reserves? I assume consumer sovereignty should eventually have the Rothbardian side winning out.
"Fractional reserve" is a misnomer. "Lend out deposits" is also a misnomer.
Banks account for extensions of credit. Credit is not renting money. Credit is paying for goods over time in installments. If I permit you to leave my used car lot with a car, with only your agreement that you'll pay me $200/month for the next 36 months, I have extended you credit. You may leave me 36 IOUs promising the payments. I value these IOUs as much as the car at the time of the transaction. Since I value them, someone else may value them similarly. I can therefore bargain when them. I could offer my landlord two of your IOUs for a month's rent. You then owe a payment to the landlord rather than to me. If the landlord and others accept these IOUs in trade, they are money.
A bank is an accounting service to which many creditors outsource their credit accounting. The bank issues notes akin to these IOUs, and the notes circulate as money. Depositing money does not precede extensions of credit. Extensions of credit create money to be deposited. Extending credit and using promissory notes as money this way involves no fraud and implies no inevitable collapse of the monetary system.
Circulating banknotes may promise redemption in gold or other specie. Gold is not the money in this scenario. It is the standard of value. When a seller prices a good, he values it relative to gold. "My car is worth as much as ten ounces of gold to me." By accepting banknotes, the seller accepts a reasonable expectation of obtaining gold when he needs gold, but he rarely needs gold. He typically spends the notes or deposits them in the bank. He may never exchange the notes for gold.
A note deposited in the bank cannot be exchanged for gold or anything else, so bank deposits indicate the demand for liquidity (demand for immediately holding gold) to the bank. If many people try to exchange deposits for gold simultaneously (a run on the bank), the bank may not be able to meet the demand, but in a free banking system, a bank's offer of gold for its notes is conditional. See Jimmy Stewart's speech to his depositors during a run in "It's a Wonderful Life" for example. "The money's not here. Your money's in Joe's house ..." At the Building and Loan, depositors agreed to wait 30 days, and if necessary, the Building and Loan could call loans to raise needed liquidity. Mortgages also had these provisos.
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Banks don't tell customers they don't have your money until the bank run, if they were honest with customers they would be less competitive, but they don't and it is hard to compete honestly with a long con that can operate for many decades, maybe even centuries.
Gold's custody had to be centralized on Banks which gave the opportunity for Banks to issue demand deposit titles that in fact meant "promise of delivery" and the rest is history. But bitcoin does not requires centralized custody and even it it happens the proof of reserves is easy to implement. So... bitcoin validates the rothbardian position.
Cartels are always betrayed by a risk-taker...unless it has DC's support.
DC is a cartel
I haven't seen Tom on anything since the Contra Cruise, but I'm assuming he won the debate given Bob's shaved chin lol
Tom Woods said Bob won the debate, and that they both decided to shave.
Good sound money presentation.
That is a good question why aren't there any banks that offer 100% Reserve
Ken Dreamer because you’d be a sucker to do so in an environment where your competitors are allowed to legally profit off fractional reserves. Just like you’d be a fool to save today’s dollar bills, knowing they’re just going to erode in our modern inflationary environment. The latter example isn’t a good thing, but this environment is necessitated by the government’s economic policies.
This feels like a repeat from a lecture Murphy did last year.
He did
Only so many things to say about these concepts, but there's always new people that haven't heard it yet
The main thing to consider is what the world is going to be like when there is no fractional reserve banking. Bitcoin is going to bring this about. No one needs a bank at all for bitcoin so certainly their ability to run a fractional reserve will be gone.
What you think will happen will never happen. Never! IMO
The success of bitcoin reminds me of the wildcat banking era ushered in by President Jackson. Competing currencies with no central bank. Unprecedented economic growth until 1913.
@@sirmount2636 I must have missed something. When did bitcoin succeed? So far, it is a belly flop.
Ed Waggoner Sr. How so? Cryptocurrency as a whole is expanding dramatically. Dogecoin, Libra, etc., etc.
Ed Waggoner Sr. Bitcoin is the best preforming asset of the last decade.
That is not what I understand fractional reserve system entails. If a bank lends out demand deposits no currency is created out of thin air, the demand deposits are backed by debtors or maybe even bank capital, it is only if a bank creates money more than the demand deposits, reflected either by creditors or debtors, that it engages in fractional reserve fraud
I deposit $1 the bank lends $1
I have $1 of credit they have $1 of credit, there are now $2. $1 was made from thin air
@@419fish If a bank lends out $1, isn't that a debtor?
@@freek45044 yes but thier point is that now there are more dollars than can be covered.
The person taking out a loan can spend it and so can the depositer. M2>M1 so debts cannot be covered and there are more dollars on the book than actually exist.
If I loaned money for 1 year there would be no money creation. Unlike the bank if I lend it shows up as future income not actual money on my acount
@@419fish No, taking his example, the bank realizes that only 50% of depositors demand their deposits at a given time, so instead of the money (deposits, gold or currency) being idle in their vaults it might as well serve a better application in terms of providing capital for the economy, the risk is obvious that there might be a run on the bank or more than 50% depositors demand their deposits back. In that case, the bank would go bust and shareholders would probably lose if the bank does not have enough capital to raise money to cover the shortfall or have enough retained earnings to cover. The point is, in this case, no inflation is created and no fraud is committed, maybe one can argue there is a breach of contract or undue risk is taken which could hurt shareholders and employees of the bank.
@@419fish
If the debter then pays back $1 plus 10 cents interest they now how $1 for the guy who gave the bank money and 10c profit to cover other credit they have lent out.
They can increase their private profits which will be part of their reserves?
Pretty new to this banking debate but would like to know what people think.
fiduciary media is 'monetarized' trust. If trust becomes a medium of entrepreneurial economic calculation, boom bust cylces are very likely to occur.
Going 100% reserve just complicates the trust tradeability.
I don't understand the free bankers point that they would only lend durring periods of saving. I also don't understand the other sides view that FRB is not fraud. Why would it or would it not be considered fraud. Anyone mind helping?
If you "create" money out of thin air it is fraud. IMO
@E_
1) From a rothbardian point of view, a guy can save 100$ and lend the money to somebody else. Nothing wrong about it: there are more savings (100$), thus there can be more loanable funds (100$).
But what if the guy puts 100$ into a bank deposit, instead? He's saving (=not spending) those 100$ until the moment he decides to take them back. Thus, if the bank lends the money out, it's just lending the guy's savings. Again, we have more savings and more loanable funds - exactly as in the above paragraph.
2) If you sign a bank deposit contract, you are giving to the bank the property of the money you are "depositing". It's written in the contract. Since the bank obtains the property of the money, it can do whatever it wants with the money - including lending it to other people. There is no fraud at all, because the bank is not infringing the contract.
@@Weierstrass88 I think there must be a distinction made between demand deposits (checking, debit cards) and time deposits. It is not possible for a bank to make my demand deposit money available to anyone but me without fraud. Years ago, when I got my first checking account (circa 1966), banks charged a monthly fee plus a fee per check over a certain fixed number (25 if I remember). By the time I was married, 1971, nearly all banks offered "free" checking.
@@Weierstrass88 The fraud is in not informing the customer that by lending out demand deposits the bank is creating money out of thin air (legal counterfeiting), thereby debasing the value of all the money in circulation. This information is not even to be found in the fine print of the so-called contract.
@@edwaggonersr.7446
Quote: "It is not possible for a bank to make my demand deposit money available to anyone but me without fraud"
By obtaining the property of the money, the bank can legitimally use it. If you don't want the bank to use the money, then you have to choose a different contract - one where the bank doesn't obtain the property of the money (e.g. safe deposit boxes). In any case, it's not a fraud if someone simply uses something he/she possesses.
Quote: "by lending out demand deposits the bank is creating money out of thin air (legal counterfeiting)"
When a bank lends money, it credits the account of the borrower. That "credit" is a bank debt - an IOU (I owe you) title. It's like me writing on a paper that I owe you 100$; thus, it's not counterfeiting. Indeed everyone can emit IOUs (and that's certainly not counterfeiting).
BTW, crediting the bank account of the debtor is covenient for practical reasons (the debtor doesn't like receiving 100'000$ in cash!) but - in principle - FRB could work also by lending the physical cash.
haha you guys all have to review your life choices!
Murray who?
JHS take first the economics problems and then the legal theory. But JHS is a Scientiae Juridical Doctor, normal he talk about that point but I agree, the law part is not the essential part. On the deflation read Philipp Bagus In Defense of Deflation, he says Rothbard was bisexesual guy (joke). I think the same on free banking guys, it's like ask -hey man, do you think is better I hit you with my hand than with a baseball bat???- Of course man, but better if you don't hit me. Good conference I come looking for some libertarians who don't know about banking's stuff and have not time for reading the books now and I found this
Yes there were bust and boom cycles before the Federal Reserve but they stemmed from the same source, the big banks that expanded and contracted the money supply using debit methodology. Not to ignore that once the Fed had been illegally instituted there was a run up financial crisis as precursor to the big financial crisis. Initially the Fed was on a gold standard with 40% reserves, in gold, required.
I find your whole argument extremely flawed because without a discussing of how money comes into existence in a reserve system based on debt, then none of what you discussed matters. The whole boom bust dichotomy is based on debt cycles. If the economy was based on a hard asset currency then there can be no expansion or contraction and lenders would be based on private individuals pledging hard assets.
Bankers have been a real threat to freedom since the first Bauer enslaved the first Royal over debt.
This is how I found out he lost the debate.
@Bryan Rothman Harry's wins again
Free banking (regulation) is neither good for the economy nor is it more libertarian or free compared to the status quo. Free banking is an entrepreneurial business service for libertarians, and a proposal for a naive and draconian and destructive law for authoritarians. The former is not political economy. It is finance.
Free banking can prevent monetary disequilibrium much better than full reserve banking.
Austro Punk what is the difference between free an dull reserve to you? To me it is a law.
@@user-wi3yx3gy2o I'm not quite sure what you mean by "free an dull" but I assume you mean "free banking and full reserve". Free banking (fractional reserve) does not constitute fraud if banks disclose their practices with the public/customers.
@@austropunk3535 do u have a list of banks that disclose it less than the others?
I've noticed that Professor Murphy had made strangely inconsistent comments on printing money in the past. He stated it would be better than not doing it in a given scenario, but now claims it always creates distortions. Mind you he made both comments after he became a critic of fractional reserve banking.
Murphy has shown to have ambiguous views on monetary theory.
If someone right at the beginning of this talk doesn't talk about the Christian prohibition of usury....it's a completely useless discussion. When are libertarians going to learn to stop relying on materialist/enlightenment philosophy in their premise creations? I am so over this. You'll always get more of the same.
@cw4091 The Salamanca School during the Spanish Golden Age accepted, as did their inspiration Thomas Aquinas, the possibility of interest and insurance. They also preached against the forced conversion of natives, all the while being the most fervent preachers and theologians who study God 24/7. You assume the conclusion.
Spoiler alert: Fractional reserve is better