Does Fractional Reserve Banking Endanger the Economy? A Debate
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- Опубліковано 26 кві 2018
- Two free market economists debate a topic that has long divided libertarians: The standard banking practice of keeping only a portion of depositors' money on hand and loaning out the rest.
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On April 16, 2018, two free market economists debated a topic that has long divided libertarians. Fractional reserve banking refers to banks' standard practice of keeping only a portion of their depositors' money on hand and loaning out the rest.
In The Mystery of Banking (1983), the anarcho-capitalist economist Murray Rothbard called fractional reserve banking "a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts." Other libertarian economists, such as Larry White and Steve Horwitz, have argued that the practice is perfectly defensible.
At The Soho Forum, a debate series in New York City that is sponsored by the Reason Foundation, Robert Murphy debated George Selgin over the following resolution: "Fractional Reserve banking poses a threat to the stability of market economies."
Murphy, a research assistant professor with the Free Market Institute at Texas Tech University, argued for the affirmative. He has a Ph.D. in economics from NYU has addiliations with the Institute for Energy Research, the Mises Institute, the Fraser Institute, and the Independent Institute. He has authored hundreds of articles and several books explaining economics to the layperson, including Choice: Cooperation, Enterprise, and Human Action.
Selgin, who opposed the resolution, is a senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and professor emeritus of economics at the University of Georgia. His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking, Bank Deregulation and Monetary Order, Less Than Zero: The Case for a Falling Price Level in a Growing Economy, and most recently Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage.
The Soho Forum runs Oxford-style debates, in which the audience votes on the resolution at the beginning and end of the event. The side that gains more ground is victorious. In this case, Selgin won by convincing 14 percent of the audience to switch over to his side.
Produced by Todd Krainin.
This is a real debate. Thank you ReasonTV.
ROTFL. A real debate, about make believe.
Banks don't make loans from deposits.
Loans create deposits.
Banks should be able to choose their individual policy on fractional reserve and let the market decide who the winners and losers are.
Well they already do. They’re required to keep a certain minimum percentage (reserve ratio) either in vault or on the books at a Federal Reserve bank, but anything beyond that is up to the banks. They’re allowed to keep a greater amount of reserves and sometimes do, just not any lower than the reserve ratio.
Except that can't carry their own commodity money or currency.
The reserve ratio is 10 percent. Are you truly arguing in favor of central banking with a State monopoly?
Paul Benedict: Precisely. Both Selgin and Murphy agree on who the culprits are: central banks and Government regulations.
soapbxprod No, but so what if I were? I’m just correcting factually incorrect claims. I care more about the pursuit of truth than I do ideological gains.
Competition everywhere. Let currencies compete (including cryptocurrencies) and let full and fractional reserve banks compete. Let the market decide.
Monopoly is the enemy.
*@2VNews* let fraud compete with respect for property rights? ;)
BobWidlefish - How is it fraud if you voluntarily lend your money to a bank, get paid an interest rate and you are told you might not be able to access your funds 100% of the time?
2VNews I was mostly kidding my friend. :) Though to answer your question: if all legal tender laws are removed and bank notes are issued on a free market basis by informed consent of all participants, then there’s no fraud. Though one can easily imagine many scenarios in which people do get defrauded by fractional reserve banking, such as when legal tender laws are imposed, or when informed consent is not upheld as a legal standard for entering into a contract with risks. In fact you don’t have to imagine it, you can look at the real world and see how people have historically been harmed by unsound banking practices (ending the gold standard, bank runs, the inflationary death of the Continental Dollar, boom and bust cycles) and still are being harmed by unsound banking practices (FDIC, Federal Reserve, Fannie & Freddie, legal tender laws, ...). Clearly a heck of a lot of people now and throughout history have lamented the loss in value of their currency because the state steals it or allows bankers to steal it. The peasants used to be able to see when their coins came back clipped or shaved. Now the people who steal our money are much more subtle. Inflation happens gradually most years and it just looks like prices are going up - must be greedy capitalists! Are the people who think such things currently being defrauded by an unsound banking system? Clearly. And yet it’s equally clear they don’t have informed consent with how the current system operates. Most people have no idea how money works, what inflation is, how fraction reserve banking functions, etc. This is an important challenge to the “everyone agrees voluntarily to use unsound money” argument.
BobWidlefish - The most regressive tax is the debt monetization tax (inflation tax), it taxes the money earned, spent and saved.
Spoiler Alert: it already has.
Ohhh...they legit cut Dave Smith stand-up intro!?
=S
They cut out Dave smith’s intro because of the making fun of Cato. Classy, reason magazine.
Is it possible to watch it still?
Don't let anyone tell you Rothbardians don't support victim culture
Which Cato?
Where? At which timestamp?
Finally, some real discussion, that's rare.
I have to say I came into this with a strong position for one of the sides...and this debate moved the needle quite a bit. Please more of these ..
I used to be against FRB, but someone introduced me to Monetary Equalibrium Theory using competing banks and monies. If you have competing monies, you wouldn't have a shortage of credit.
Hey, I think that was me ;)
Cash is Debt, they print it at will you have no Control on your own finances while using there store of value
@@cultusgti That is why it is important to have competing monies. You use the safest debt notes or "hardest" money with the best store of value. You see this in crypto. Saifdein Ammous talks about bitcoin being the hardest form of money. Although, crypto is still very volatile because of the limited adoption and regulatory cartelism by governments.
There's no such thing as a shortage of credit. If you need a loan and you can't get it, it's because your idea or your creditworthiness is lacking, and/or you won't accept the high interest rate. There's always someone willing to lend.
Sad that this only has 12k views...
I think the main point of contention between the two was sadly missed, even though George had to allude to it once. That is: FRB doesn't produce *perpetual inflation,* but it *does* create a "one-time" increase of outstanding credit (he admitted going from 100% to FRB would be inflationary *once*). But that's Bob's point! And it doesn't need to be inflationary (in the ABCT-sense: credit creation above savings, causing interest rates to fall too low, causing simultaneous over-consumption *and* over-investment) afterwards. The business cycle was already put in motion, and *some* investments will be unsustainable.
After the credit *contraction* (that is the result without central bank intervention) occurs during the bust, we would expect it to grow once again. And so on and so on. Obviously that resulting business cycle will be *much* less severe than one with a central bank pumping in new money on top of that.
I'd be interested to hear if George agrees with that story, but simply thinks the gains from additional "artificial" credit/investment in the meantime make up for the potential downfall. Or *why* he thinks this isn't artificially stimulating, even though no consumer with a bank deposit considers that as anything but cash and doesn't limit their consumption accordingly.
I agree. This seems to be the crux, yet Murphy didn't follow-up on it. Timestamp is about 57:00
d4n4nable Yes. The critical questions are barely addressed in this debate, imho: (1) Why, or why not, would business cycles still occur in a laissez-faire economy with FRB [Note: For all of Selgin's talk about the historical stability of FRB banks, he nonetheless ignores the business cycle question]; and (2) Would FRB reserves in a laissez-faire economy tend to approach 100%....and if yes, how closely? (IOWs: How severe would business cycles be in such a syste [m, assuming an affirmative answer to (1) above.)
You have to have sound definitions of inflation and deflation first, and I will resort to Mises for this. Monetary inflation is an increase in the supply of money in the broad sense so as to include fiduciary media that is not neutralized by an increase in the demand for money in the broad sense. This leads to relative price distortion through Cantillon Effects. Same thing with deflation. It is a deficiency of money based on the demand to hold money leading to a fall in prices. These are the soundest definitions as they include both supply and demand for money and all of the money supply. One point that is missed is that there are also Cantillon Effects during deflation; relative prices are also distorted when there is not enough money. Another point, basing inflation/deflation on individualism, these phenomena ultimately occur every day on an individual level. The value of money is thus always changing. The practical problem is preventing BIG changes in purchasing power(which is beyond theory). Money creation is not ALWAYS inflationary if it meets an increase in the demand for money. FR free banking would be subject to profit and loss and competition so as to ensure too much money isn't created. A prerequisite of the boom is a significant amount of monetary inflation propping up all prices. This is only possible under central banking. Under FRB, banks would create more credit so as to please money demand and ensure that savings = investment. When investment > savings, this leads to malinvestment and the business cycle. When savings> investment, the economy comes to a standstill. Sure, FRB may cause baby booms and busts but they really won't be significant enough to be a real problem. Without it you also render the economy vulnerable to deflation.
Credit contraction is not a natural sequence of the bust. There shouldn't be any credit contraction as this will lead to monetary deflation and unnecessary pain. Price deflation is inevitable as the economy adjusts to real factors. But there are also Cantillon Effects from credit contraction
Hey @ReasonTV - where's the Dave Smtih opening?
Is is ok when you support the debate on college rape but not when he's making fun of Cato?
What jokes did he bring at Cato's expense? Some Ed Crane material?
Think of fractional reserve banking in a free market banking environment as Schrodinger's banks. And your deposits get paid interest based on the level of risk (reserve ratio) the bank employs. When you look at your account your balance might be there or it might not.
That's an elegant analogy- thank you!
Great debate. I went back and forth agreeing with each of them until the other spoke again.
Great debate!
I like you, Bob, and I've learned a lot from you. But I think you're wrong about FRB. People who watch this need to know that you don't have to be a team player. Think for yourself and don't be hurt if find out that some of your views are wrong.
Check out Wayne Jett's book, The Fruits of Graft - He destroys Keynes and centralized anything!
CATO V MISES! OH is this the BEST! VIVA ROTHBARD and HAYEK and all of the Austrian and Chicago School wunderkinds... :) I love both of these true economic giants. Both Hillsdale College and CATO/Mises Institute affiliates. Both Selgin and Murphy agree on who the culprits are: central banks and Government regulations.
Couple years later there are no reserve requirements
Never mind that. This is a good debate, about make believe. I refer to it as a debate about the unicorns on the Moon. It just as well be.
Reserves don't fund loans. Loans create reserves.
I wish Bob had continued his example.
OK, so the Goldsmith's loan now notes that he has 20 coins but since he tore up the 200-coin note upon repayment there are only 980 coins left. We're assuming a closed community here.
So that 980 for the depositors means they can't all take their money out any more. This is what Bob calls inherently destabilizing.
But is it better for the economy? Presumably the community has been paying storage fees. Did those exceed or fall short of 20 coins?
The community now has a new business, which presumably makes it richer overall. Does the 980 coins represent a larger basket of goods now in a deflationary environment?
If so, is this a bit of socialist ends-justify-the-means argumentation on the part of George? If everybody has become wealthier in real terms is the diminution of their coin storage an actual taking?
I really get the feeling that the opponents were arguing different propositions and I really didn't care who "won" in Oxford terms before the end.
The format's time limit prevented satisfactory resolution. I'd like to see this debate continued on a long-form medium without an artificial clock. Both men made their (different) points well, but banking and social stability are separate topics. It comes down to which definition of "endangering the economy" you're looking at in the moment.
Bob Murphy is a beast!
THE BEST! CONTRA KRUGMAN
Buffoonery doesn't prove anything.
Calin, a great site to learn about the Austrian School and what Bob Murphy adheres to when he elaborates on the Fractional Reserve System, is mises.ro/. I agree that Bob could be a more eloquent speaker and if he was calmer, he'd have a better chance of getting his point across. Nevertheless, the subject of how the FRB leads to the boom/bust cycles stands strong and should be debated more.
He is. I like him a lot. But George Selgin is on the right side of this debate.
Not in front of real giants like Selgin, White and mainstream Economists
Can they both be right? Both make logical arguments
bob spent too long defining terms to really get his point across as clearly as he could have done
Singing Physics, every time he does a debate he starts off kinda of weak and losing because he spends time laying a foundation then he just destroys at the end.
I think it’s a good system.
I actually disagree. I think he got his point across better than Selgin did, but I tend to agree with Selgin more. I felt like George was a little more scattered than Murphy.
He is always like that
George Selgin is the 🐐
Unfortunately for Selgin, you can't debunk a praxeological argument with evidence.
True. But the Rothbardians have sadly twisted Mises' sound theoretical arguments on money. Monetary inflation according to Mises: an increase in the supply of money in the broad sense so as to include fiduciary media that is not offset by an increase in the demand for money in the broad sense. Deflation is also defined the same way in reverse. These are phenomena that ultimately happen at the individual level and are in this sense inevitable. Changes in money's purchasing power are inevitable. The [historical] question is how to prevent BIG changes in purchasing power. The boom is a specific type of monetary inflation that hits the loan market first. Monetary inflation of the sort is not possible under free fractional reserve banking but only under central banking. You also need history to see the extent as to which FRB booms and busts affect the economy. They would be negligible and not really a problem in laissez faire banking.
@@OrthoHoppean Why is it possible only under central bank ? Whats the difference ?
ba...boom!! What a fantastic debate topic, and two absolutely world-class scholars.
This debate tells me that there is nothing fundamentally wrong with fractional reserve banking, but that the system has been thrown off quilter by government intervention and currency monopoly. It seems we should do 3 things, more or less:
1. Go back to a gold reserve standard, and remove the government's monopoly on bank note creation.
2. Let banks set their own interest rates so that the free market can regulate itself by setting a cost to lent money without central bank/government control. This will remove the problems that arise with artificially low interest rates set by central banks.
3. Educate the public on what fractional reserve banking is, and possibly require banks to explain on the opening of an account that the account is a fractional reserve account.
As a Canadian if our banking system is so stable why did the government recently give the 5 largest banks $50 billion. Also in 2009 they received $114 billion. Also the Canadian Mortgage and Housing Corporation bought home loans from the banks. Not to mention our government backs deposits up to $100,000.
I think all of this encourages banks to take more risks knowing the government will borrow money to help them.
Selgin touts the Canadian "free banking" era of 1817-1935, and particularly 1867(confederation)-1935, not the 21st century.
He's no fan of Canadian compulsory deposit insurance which didn't begin until 1967, and he doesn't claim the present-day Canadian system as his "version" of fractional reserve banking although I suspect he would say it's still a lot better than the American system.
As far as why Canada still hasn't had a crisis in the last 85 years or so, while the USA has had the S&L Crisis and Great Financial Crisis, Calomiris and Haber credit the Canadian senate for stopping many of the populist bills that attempted to force lower lending standards on the industry--like the Community Reinvestment Act or HUD's edicts to Fannie Mae and Freddie Mac to assign 56% and 24% of their mortgage purchases to "below median income" and "very low income" borrowers.
From my own experience my friends in Canada have explained their mortgages to me and they sound far more stringent requiring far higher creditworthiness for borrowers than in the USA. They even have to keep requalifying every five years to maintain their mortgages.
You can read Calomiris' take on Canada, for better or worse, in his book Fragile by Design.
yes the make the cad weaker or stronger insted of letting the banks go bankrupt
Distinguish clearly between two types of claim: IOUs and ownership titles. I you deposit your money, say $1,000.00, in a current account, you are effectively trading those dollars for an IOU with a nominal value of $1,000.00. The bank is now the legal owner of those $1,000.00, not you. You own the IOU issued by the bank which is a liability of the bank.
Now use this distinction to listen to the debate.
Cool,Selgin has very good arguments.
Kept cringing every time one of them said " a lot of economists think"
TLDW: Murphy: freedom + property rights works best and is economically sound and is probably more ethically and legally sound in a just society. Selgin: the “right” small amount of state interference/regulation in banking has worked pretty well, some amount of counterfeiting increases total prosperity, and the legal and ethical arguments can be side-stepped if we imagine bank note holders agree to this scheme.
No,regulation has not,and will worked well.
FRB isn't counterfeiting, it's debt transfer. New money isn't being put into the market. Multiple parties feel they have claim to tge same money.
The debt is paid back with inflated money and below market interest rates.
That’s not Selgin’s actual argument if you are familiar with his scholarly work.
FRB is NOT fraud. It is not a breech of contract nor unethical. The freest banking systems have all been dominated by FRB. The few full reserve banks in history have been state-backed. FRB can lead to malinvestment, but it also prevents underinvestment. A free banking system would involve fractional reserve banks ensuring that they balance their assets with their liabilities
you could have both models supported by 1 bank institution, 2 different chequing account ,2 different insurance on the money and 2 different monthly price for the account...it's very simple.
I was continuously disappointed to hear Selgin saying "I don't have time to go into it now but ....."
Wait ....this is the time that was specifically set aside for you to "go into it". I didn't tune in for a reading assignment of Adam Smith at a later time. I'm here for a debate.
Speaker: 22:40 "Real life bank runs are seldom unprovoked."
In walks Coronavirus.
bbl4tter and with it, in walks a giant increase in bank deposits (the exact opposite of a bank run)
@@mtgonzales You are right, initially...
Those bank deposits are fueled by fear and they mean a reduction in consumer spending (Look at M2 money supply velocity trend). Then business income decreases because their customers are saving instead. Businesses shrink, lay off workers, go out of business, and default on their bank loans. Unemployed stop paying bills and reduce spending and savings. The corresponding loan defaults pose a major risk to banks due to the high leverage applied to deposits when issuing loans. Government mandates force businesses to shut which compounds this problem by direct artificial restriction of the supply of goods and services.
A bank run does not have to be consciously provoked either. Unemployed workers stop saving due to loss of income and are forced to withdraw to survive. These withdrawals become sizeable when unemployment is high. This alone can "run" a bank to insolvency. Only like 20-40 mil are unemployed right now. No biggie.
Why do you think the federal government decided to boost unemployment benefits by 600 per week? Why wasn't standard unemployment enough? Why did nearly every citizen receive $1200? Nearly all of this money was direct deposited into bank accounts. How convenient. These excessive cash injections prevent runs by converting those who would normally withdraw under these circumstances into both savers and consumers with the added benefit of providing a much needed liquidity injection to help banks meet their liability obligations. This is one of the most effective stimulus techniques imaginable but like all good drugs, it is expensive, easily leads to abuse, and is extremely dangerous if sustained long enough.
Or maybe you are right. People are saving and banks are doing great. Why should anyone worry that a bank who is allowed to loan out 100% of "your" money might not get that money back and therefore might not have "your" money? Yes, that really is 100% because the Fed lowered the reserve requirement to 0 in March which means banks literally are not required to have any cash in them. Don't worry, everything's fine. No sign of insolvency or financial crisis in sight. Worst case scenario, FDIC insurance has your back.
Why is the system so complex? Maybe if person could understand the system it would be much easier to control
I was waiting for that. I'd be fine if either man designed our banking systems, but I tend to agree with Bob's position, at leas to some degree. FRB seems to have *some* effect of extending credit over actual savings.
NB When you deposit funds to your current account you are actually lending those funds to the bank - that’s what the contract you signed says - even if you think or believe that you are doing something else.
If funds deposited in current accounts are fungible and, as a matter empirical fact, a large percentage of them remain in a bank, why shouldn’t the bank be able to use them to make loans?
If everybody wants their money bank at the same time the bank wouldn't be able to pay. Yes, of course. And if the bank's loans do not perform the bank won't be able to pay holders of time deposits either. There's always a measure of risk in lending your money.
This seems a more settled question than does the ethical impication of Invesment Vs Depost Banking - Should all banks be allowed to gamble on the market with your money?
As long as they inform depositors of the potential risk/reward.
...and as long as there are alternatives to banks that do so, thats the problem.
5:57 -- I would disagree with that statement "under 100% reserve banking, bank runs don't happen" -- a bank run by definition can still happen, its just that the bank isn't in trouble when it does. They may not happen very often, because the bank can handle the surge, and the customer's know that, but its still possible...
Bank run happen when depositors try to withdraw their demand deposits.
In 100% reserve system all money in demand deposits should be there, otherwise its fraud issue, not bank run issue.
Withdrawing time deposits before specific date is not guaranteed, and its only your issue if you want money before, and bank declines it.
If bank loses money from time deposits and cannot pay it back, its bankruptcy, and again, not bank run.
Lost it with the coat check analogy. A coat check must return the same coat you gave, and you can't leave it there for any amount of time. A demand account only has to return the same value, not the same dollars, and if they leave it there, the bank is happy.
With a commodity based currency, the same value is assured.
Um, that's because coats aren't fungible?
You could use a storage facility for any fungible good as an example instead. Imagine a village with a communal grain silo and an overseer that keeps track of how much grain the local farmers put in. He gives out receipts to the people that deposit grain so that they have their own record of how much grain they have in the silo. He starts selling some of the grain on the down low to make a bit of extra money, figuring that most farmers will always leave at least a bit of grain in the silo, and he can buy more grain from the next village over even if everyone wants their deposit back at once. The problem here is that the farmers think they have a demand deposit, that they can go up to the silo at any point and get out exactly as much grain as they put in, even if it isn't the exact grain they grew on their land. The overseer of the silo isn't treating it like that, and the knock on effects this will have on the economy are obvious, because people will be much less thrifty than they otherwise would be, assuming that there's more grain available than actually exists in the silo.
Money supply increases should fund the Federal Government directly instead of poring in through the big banks as loans
Read Robert Murphy's book, How Privatized Banking Really Works - Maybe he'll thank me for the plug with a free copy?
Modern consumers do not wish to make loans to banks except consciously, as in via CDs. The FDIC effectively acts as the full-reserve guarantor of regular folks' money, it would seem, lending an otherwise risky and unstable system an essential solidity, though the commentator claims that this causes risk on a systemic level by allowing consumers to not have to know the risk of banking with a given bank.
26:46 - Free bankers on business cycle
10:27 atm machines lol
What, no Dave Smith opening?
EverydayNormal He made fun of the Cato Institute, so they removed it, scumbags.
Noah Mickel what did he say ?
Selgin conceded the whole debate when he admitted that bank runs are impossible under a 100% reserve banking system, he admitted that 100% reserves would be more stable, which was the debate resolution being discussed. He just limited himself to explaining some advantages of fractional reserve banking that in his view would outweigh the added instability.
If the benefits of fractional reserve banking outweigh its potential problems, then fractional reserve banking does not endanger the economy. Suppose I had a car accident and need to go to the hospital immediately. An ambulance comes by and picks me up. The ambulance drives fast, which creates a potential hazard. Is the ambulance posing a net danger to me? Probably not, since the benefits of using the ambulance to receive proper medical attention outweigh the danger of a potential accident on the road to the hospital.
So professor Selgin is on track.
The question was whether the economy was "endangered". Instability is not the only danger.
@@Myndir "Fractional reserve banking poses a threat TO THE STABILITY of market economies" @ 1:45. The title of the video is not the same as the resolution as discussed.
@@DVHeld Free fractional reserve banking is not unstable. Any instability that is attributed to it is thanks to central bank intervention
I thought Selgin did a great job in this debate. Coming into this debate, my opinion was that the problem with fractional reserve banking is not the fractional reserve aspect itself but the duration mismatch involved with demand deposits. They can't truly be demand deposits unless the bank is merely providing a warehouse service, and any deposits which you wish to allow the bank to lend out should be deposited for a specific term (e.g. a year). But thinking of demand deposits as call loans -- that is, loans with no specific term -- makes quite a bit of sense. Most people are fine with depositing their money in the bank as a loan with no definite term in return for a cut of the interest that comes from the loans the bank makes, and it works quite well.
Problem is always greed. Banks greed causes Mortgage crisis, because they want more evaluation income that is result of selling AAA rating for mediocre MBS, even junk bonds get B or C rating. There is a scene that, if i do not give this pack a good rating. The bank in next lane give rating, i lost revenue. Then problem become race to bottom.
Fractional reserve banking is not inherently evil for good bank. But there is good people and evil people in world. Good intentions did not solve Mortgage crisis, money of people stolen solved that.
@@murat9268 ? Greed has always been a part of humanity. Greed didn't suddenly spike and cause the mortgage crisis. If the simplistic "greed" argument was really the answer, then we would see nothing but crisis. But no. Greed is kept in check in the market. You want money? Fine. Go out and produce something of value to your fellow man. If you can't, then you will lose. Same thing keeps banks in check. What caused the mortgage crisis was central banking creating monetary inflation that lowered interest rates, pooling this inflation into the housing industry through Fannie Mae and Freddie Mac, and eventually this boom had to come to a bust. This sort of thing is impossible under a market economy
The root of the problem isn't fractional reserve lending. Counterintuitively, the problem can be pinned on the FDIC insurance that comes with every bank account (i.e. that thing that protects up to $250k of your funds if your bank goes insolvent). To illustrate why, ask yourself this: What is *your* bank doing with your money? Can you actually answer that? Neither can I, nor can most people, because unfortunately nobody cares anymore. The government, in its infinite quest to protect people from themselves (i.e. treat adults like they're children), took away the incentive for everyone to act as educated consumers.
A long time ago, banks worked hard to build reputations based on trust, and having such a reputation was an existential concern for every bank. If they once again had to *compete* to gain your trust, because you knew you'd be out of luck if they lost your money, you wouldn't hesitate to put in the extra effort to find out which banks act responsibly vs. which ones take on extra risk to squeeze out the biggest profits for their executives (not you). The market would self-select those banks that behave in a way which most people would approve of them behaving with their money. If a bank wanted to do risky things, it would have to entice potential customers by rewarding them in some way for taking on the extra risk.
In short, the free market would sort it all out. It's only when incentives are skewed by artificial policies (like government-provided insurance) that we have a problem, even when the intent is pure.
At one point, George Selgin said that boom/bust cycles are cause by central banks (which I'm sure they do cause some and exacerbate others); but those cycles existed before central banking as well. Also, if a bank ran 100% reserves, how would it make money if it had no money to loan out? I suppose they'd have to charge depositors a storage fee?
This is what really happens
elliswinningham.net/index.php/2016/02/09/the-money-multiplier-how-banks-operate-in-the-land-of-make-believe/
There were recessions before central banks but you'd have to engage in historical analysis before concluding that they were business cycle phenomena. Not all business downturns are part of the business cycle. And yes, they would charge fees
Recession and bust is different
Literally every single boom and bust is caused by an expansion of credit or capital being directed towards terrible investments (look at the tulip boom and crash, as well as literally almost every single "panic" (recession/depression) the US has gone through)
And who controls the supply of credit now and most probably forever?
It's not the banks, because if they did, by virtue of being subject to common sense, that is to say, "we have a limited supply of credit/capital we can lend out, so we should deliberate carefully", the likely hood of the banks caving in would greatly diminish, because they wouldn't risk insolvency
BUT, because central governments around the world are pumping banks with low or sometimes no interest capital, they (banks), being the agents of market that they are, seek to profit by spending money they did not make/acquire (so not theirs), on investments that would never have been chosen had they been constrained to their initial sum of capital.
So when, inevitably, interest rates are risen by central banks in realization of their colossal error, those (and it is almost always big banks) that have loans from them are forced to start paying, except that they can't because almost all their investments are god awful.
Full reserves can and do function, as do fractional reserves (provided the currency is backed by something as it limits the ability of banks to expand the supply of currency/credit at a whim and thus the damage they can do pumping cheap credit to banks).
This is just my surface level observation as a beginner "economist" (most of them are fucking morons)
I didn't know Al Gore had shifted from warning about climate change to extolling the virtues of fractional reserve banking.
If banks are a private entity, then how the banks makes their money is the wrong question being debated. The question should be whether the bank should be FEDERALLY INSURED or NOT.
Is fractional reserve banking inherently unstable, sure. Does that mean 100% reserve is better or that the likely minor instability is horrible, no. I like the idea of being able to choose whether your bank account is fractional or not at any bank you want. If you choose 100% instead of fractional you pay the necessary fees.
It would be ideal to have a choice, as a matter of fact in the past there were two types of banks: deposit banks and lending banks. But they merged into only one type of bank, the commercial bank.
@@solitarygal341 There are some choices, albeit not obvious to most people :).
Outside of US, you have things like Wise, that is non-bank payment provider based in UK and holds variaty of currencies.
In the US, OCC tried to issue simplified bank charters for Fintech that would also only allow payments, but the proposal got stuck in some legal mess.
But there's Wyoming with their SPDI licenses that allowed for banking but not loaning, I believe. Kraken has the license and it's reputable. :)
Although at this point, why not go further and use hard money instead of Fiat and be your own bank? :)
Well why would they when fractional reserve banking is so much more profitable.
5:01 Bank notes? Like the thing in your hand that you just claimed was the "base money". It says right on it "Federal Reserve Note".
I concede that a central bank printing money out of thin air would distort relative prices, but I fail to see how this has anything to do with fractional reserve banking.
Most of the money created in the economy is by private banks.
Not central banks
@@intranext1359 Private banks can continue to increase the money supply with an increasing base money supply that central banks generate. Under free banking, banks would most likely follow a commodity standard with a generally fixed supply of base money, limiting their ability to perpetually inflate the money supply
@@OrthoHoppean
money multiplier theory is false.
credit creation theory is true
@@intranext1359 There have been many refutations of credit creation theory. It's pretty nonsensical from what I've seen
@@OrthoHoppean
Please show me the refutation?
Prof. Richard Werner showed empirical evidence that the credit creation theory is true.
Note: credit creation theory is NOT credit theory of money
8 debates? Jeeze that's a lot of slack jawed closed eyed audience members.
Their applause was enthusiastic though
Why is there even a debate? The constitution states (Article 1 section 8) Only congress can set the value of money.
Where is the Dave Smith opening???? So he makes fun of the Cato Institute and you remove him...
every bank is pre run insolvent. no bank can hold up to a run.
You're right that no bank can hold up to a run, but a bank can be solvent but "pre run illiquid" if its assets are still worth more than their liabilities but it just takes more time to monetize them than the depositors will allow. That kind of bank would be called "pre-run solvent."
I’m for whatever the fuck the banks and their customers would like to do banking.
This guy has, obviously, never seen It's a Wonderful Life.
Free Market system of banking? why not have fractional reserve and 100% reserves and see how the market performs.
Or a full reserve system. Google "Proposal for Monetary Reform 1939". It's a bit long so you could also look for an article or something that summarizes it.
@AnaisMartane 😂
George delivers a knock-down blow at 1:06:50 and should have won this debate. It's not like the banks had a choice about fractional reserve. Note issuing banks couldn't have operated any other way. And neither could the goldsmiths before them.
I can't tell which side won because I can't understand what they're talking about. If in a 100% reserve banking system the majority of money just sits and the bank and no one ever claims it then why is fractional reserve banking inflationary as long as they're keeping reserves that are adequately greater than the amount that people generally want to claim? Wouldn't it only be inflationary if they weren't keeping adequate reserves in the bank? But obviously they don't have to keep it at 100% or even close because no one ever claims that.
If you really want to know how it works, check out Warren Mosler , Randall Wray or Real Progressives.
@@JohnnyJr396 no
“There might be a slight fee every time you swipe your debit card”...BWAH HA HA HA....ever sold anything on eBay and given PayPal 5% of the transaction? That would be every transaction, 10x a day.
mineralt then you would LEAVE the bank for a better one. It would be much more similar to buying gas at ARCO. A 35 cent fee on top of your purchase. Maybe adds up to something like 10-20 a month? That seems like a good deal if it means no more boom/bust cycles.
My beliefs of jurisprudence say that fractional reserve lending is not binding. More fundamentally, the concept of debt is nonsense. How could one transfer titles to money they do not own? How could someone sell their non transferable right to the fruits of their own labor and their control of their right to the titles to property in a just system of law? A theory of law that allows a person to sell themself into slavery is the same as one that allows a person to sell obligations against their own name in the form of debt.
I enjoy a real debate. Of course, there are always a few pompous crowd members who exaggerate a laugh at a mildly humorous joke towards the opposing argument.
reason lol,,,I think you want to change your title if you think we have fractional reserve banking
38:30 - Bob nailed Selgin on that point. Basically, caught Selgin admitting that the checking account money belongs to the depositors and not the bank.
"WoW!"
How do we begin?
Where is your starting point?
The "commodity money" vs. the paper money needs to be re-thought.
Why?
Paper is also a commodity.
However, when fused together, known as ivamu.com - you have all the inconveniences of paper "money" vs precious metals - gone!
And, the US Constitution defines real money as Gold and Silver Coin. It does not say how much. While seeking to purchase Gold Foil, I discovered, in the Fall of 2010, that a single Gram of pure gold was selling for $30 Per GRAM. [in FRNs, Federal Reserve Notes, aka USD]
All perceived " inconveniences" disappear. Evaporate!
And, it is then not able to be printed out of thin air. It dramatically rolls back.ALL pre-existing inflation.
With Value that can not be overproduced, invoking inflation.. In fact, inflation is eliminated. by the elimination of USURY that can no be applied to a precious metal economy as witnessed in 1929, Which the Federal Reserve "fixed" that problem by stealing ALL private ownership of Real American Gold.
MOST people now paying taxation to the IRS would also no longer be liable to pay any of the fruits of their labor to this hideous organization - Which does nothing to earn it.
They fail the American people by becoming useless eaters.
Predatory. Does anyone have ANY proof that the IRS "donates" what they TAKE and it is then deposited to the General Funds Account over at the Dept of Treasury?
Please share, if you find any such proofs!
How did the FED "FIX" this problem? They STOLE all Gold privately owned by the American people, using a seated US President, FDR who ordered all Gold to be handed over to Federal Reserve Member Banks.
Interesting how they claim not to own any Gold today.
My best guess is that it was all melted down and shipped overseas to the private vaults under the control of the Rothschild's Family..
It is still ours, and they MUST return it.
Making Restitution.
It is the RIGHT thing to do,.
If they rebel, then we send in our US Troops, and we TAKE it all back.
BLAST those Vaults~!!!
To show the TRUE AWESOME POWER of this simple concept, for which a Patent Pending has been established, consider the fact that one of (then) FED Chairman Benjamin Bernanke's personal body guards not only resigned from the FED, he also contacted me.
We have spoken by phone from WDC - he has told me he fully endorses the IVAMU Concept and is now fully opposed to the existing FED.
He further informed me that the FED Building in WDC is essentially Luciferian and serves as a key Masonic Lodge.
Christians need to ask themselves, is having a cabal of Satanists in control of the "money" supply, honoring the Christ who literally kicked out the money changers from the Temple, what we ought to be silently consenting to?
Probably not.
IVAMU.com has made significant headway with others who are employed at the FED.
www.IVAMU.com
DEFI IS THE FUTURE!!!
I think that the gentleman who argued for fractional reserve banking was very knowledgeable and had the better of the argument than the gentleman in favour of the Von Mises thesis. However, I am still looking into it and note that the current system has led to huge debts and perennial inflation, which surely should not be. So, maybe we need to tweak the fractional reserve and deal with excessive gaps between reserves and loans.
I would love to see Richard Werner debating both of them,and introducing credit creation theory,which is according to Werner empirically proven,banks are not intermidiaries and they don't lend fractionaly,they create new money and credit out of nothing
It only endangers the economy if it's not clear in the contract between the bank and customer that they are not guaranteed to actually have your money when you ask for it. If this is the case, and the bank is attempting to conceal the fact that they are spending your money and not guaranteeing you can take it back, the bank is committing fraud, which is stealing from you. Stealing is a violation of the NAP.
That having been said, *There is nothing wrong at all with fractional reserve banking (or EVEN something like "no reserve banking") if it is clear in the contract. This gives every customer the understanding that they are taking a risk with placing their money in an account with this bank, since should it go bankrupt, they could lose their money. *
Of course, it won't matter that we're having this debate soon enough, because soon the fiat currency system is going to completely fail and collapse, and become entirely replaced by decentralized cryptocurrencies.
The bank is really not spending the depositor's money, the bank creates credit backed by only a fraction of the reserves it holds. Why clients cannot all cash out their bank accounts at the same time is because the expanded credit (which was created by the bank out of thin air) turned into bank accounts, such checking, savings, money market accounts. Borrowed money end up in other people's accounts (the ones who sold a product or service to the borrower of the loan). The bigger question would be, why are banks allowed to create credit out of thin air and backed only by a fraction of base money they hold in reserves? If any person would do something like this, it would be considered fraud.
LOL. Deposits are not used to make loans. Loans create deposits.
The reserve requirement has been zero for 2 years! ROFL.
This entire discussion is non sense.
25:20 Big and diversified like Bear Stearns or Lehman Brothers? Also, the argument against fractional reserve that just eliminating fractional reserve bank isn't enough to fix the program is not a very good argument.
Lauren Shackle those were both investment banks without a base of stable deposits. you are proving Selgin’s point.
A lot of the argumentation is complete nonsense. Which is to say, they are arguing things that are for the most part either theoretical or anachronistic, nether of which has anything to with what we have as _modern_ banking.
They talk about gold and "ban notes", and tickets, and we're supposed to think, oh well that sounds like it means something so it must be true. When was the last time you took out a loan and got a "bank note" or deposited money and got a "bank note"? For the most part, when you deposit money into a bank really all you have is a bank statement showing some amount recorded in your "account". And when you take out a loan, the bank transfers money from their reserves into your "account". So trying to argue in terms of "bank notes" and what not is specious because that's not who most banking (if any) is actually conducted.
One fallacy is that commercial banks do not create money, only the treasury has the right to "print" money. If commercial banks were creating money that did not already exist, that would be counterfeit money and fraud as they are not permitted this power. Now, the Fed can play games that essentially creates money. The Fed can simply add to your account with them, effectively creating money. A commercial bank would be committing an illegal act in doing that. All a commercial bank can do is to "transfer" money from one accounting column to another. For example, transferring the (existing) money you deposit with them into their "reserves" and then potentially transferring from those (existing) reserves into the account of someone taking out a loan.
But we also need to understand what is "money". People see, to think that gold is somehow different from money because thy talk about you can put your gold in the bank or you can put you money in the bank as if they are two different things. Principally that "money" is a "record" of some gold somewhere as if gold has some inherent value in and of itself that it essentially lends to "money" to give money it's value. This is specious nonsense. If you have a tone of gold are you really somehow better off? Yes you say? How exactly? You say because you can buy a lot of stuff with that gold. Well, exactly. It's not the gold that is of value to you in and of itself, but that for which you can _exchange_ that gold _for_ . So how is "money" any different? If you have a lot of it, can you not also exchange that for a lot of stuff? So really gold and "money" are exactly the same - their value is not in the thing itself but what it can be _exchanged for_ . So to argue as if gold and money are somehow different is in reality specious.
So the basic principle is this: anything that is used as "money" - it is the value of that for which it can be exchanged that gives "money" its value. It does not matter the item being used as "money" but only in that value of goods and services for which it can be exchanged. Now, it is true that some things have certain _PROPERTIES_ that make then better or worse for use as "money". This is why people view gold the way they do - not because there is some inherent physical _property_ of "money" obtained by 79 protons, it is that 79 protons have _physical properties_ that make gold effective to use _as_ "money".
So when you deposit money in the bank what exactly are you then depositing? Firstly, you are depositing _exchange value_. You are depositing the exchange value you are owed. You are depositing exchange value that you do not currently need. What is also important to note is how you come to be in possession of that owed exchange value. At least in a free market economy, the way you come to be in possession of exchange value is to have created value for someone else in exchange for that exchange value. But rather than directly exchange goods and services which one of the exchange parties might not have that are wanted by the other, one will exchange a proxy for that value, aka "money". So rather than getting specific goods and services in exchange for the value you create, you get a proxy for that value (which is in turn the proxy value for something they created and exchanged) such that you can take that to someone who does have what you want to exchange for that.
And we can see what is a "loan" in basic terms. They get this part wrong as well, but then so do most people. Once you have created value for someone else, you can lend your claim to exchange value to someone who has not yet created value for someone else. That is, that someone can borrow your claim to get an exchange for themselves before having created exchange value for that thing. Now, at some point, they will have to create value for someone else so that they can return to you your exchange value claim. This is a crucial economic tool. For example, if you want to produce and sell a product - this will create value for the recipients of those products and you will get exchange value in return. The problem is if you don't already _have_ that exchange value, how can you exchange for the resources (like materials, labor, tools, etc.) that you will need to produce that product? You can borrow the exchange value that someone else has accumulated and then use a portion of that exchange value you get from the sale of the product to return that exchange value to whom you borrowed it from. And if the exchange value your get from the sale exceeds that which you owe, that is your profit or income. This is fundamentally how you grow wealth in an economy.
But back to the point. So the reality is that in reserve banking, the bank holds a fraction of that exchange value to have the reserves to return the portion that may be demanded in the short term. The rest of the exchange value is then lent out for others to utilize that exchange value. Everything else they said, by whatever mechanism and what not is really nothing but a smoke screen or distraction from this basic fundamental principle.
This is why I say that money is the greatest economic invention ever, but the worst invention for the discussion of the economy. Money gives us a portable tool, proxy in exchange, or "container", in which to store and manage and exchange our exchange value. But people try to discuss the economy as if money is its own inherent value thus distracting from what is actually economically important: _exchange_ value.
You're absolutely right.
Whatever is the most liquid.
The same money can't be in two different places at the same time. You can't loan out someone else's money at interest (without its owner's informed consent) while simultaneously keeping it in his/her account to withdraw or transfer at will. Keeping the same money in two (or more) places at the same time lasts only as long as there isn't a "run" on the bank, in which case the fraud is revealed, and the money that was temporarily in multiple places collapses back to only one place, leaving some people with their cash and others with nothing.
Why would anyone even think of it like that? As if you show up at the bank with dollar bills with a serial number, lend it to the bank which then lends out the _exact_ same dollar bills with the same serial number to someone else creating this ridiculous situation of two people laying claim to the same money. The money you lend to the bank goes into the banks account from which it lends out various amounts to others and with _different_ exchange instruments. Besides, if I get paid through Direct Deposit, I never even _see_ dollar bills, nor does the recipient of a bank loan if the funds are transfer electronically or by check. The bank owes me back the purchasing power I lent it which could simply be an increasing in the number of my bank account from which I might withdraw an amount equal to numbers which appear on dollar bills should I choose cash. No one is laying claim to any specific amount of money or any specific dollar bills with a serial number on it. I just don't get Austrians...
17 of the 23 Libertarians in the state of New York were in attendance...............................and true to Libertarian events probably 0 women who were not paid to be there.
Get your acts together, ladies!
Women in politics is largely what got us to this point
Found the ugly sexist in the comments.
Abolish the Federal Reserve, FDIC and all bank regulations. Treat gold, silver and cryptocurrencies as legal tender (not as assets) for tax purposes.
2VNews taxation is theft.
Right, I said don't tax gold, silver or cryptocurrencies.
2VNews I’m with you, taxation is theft and it’s good to not be taxed.
How come Bob never brought up the point that Austrian economic theory is a priori - not subject to historical or empirical refutation? That would've been an easy parry to George's historical points
That doesn't mean Rothbardian monetary theory can't be theoretically refuted
Funniest video of all time. Deposits don't create (fund) credit. Credit crates deposits.
Why are two Austrians debating. Surely keynesian would have been better debating with one of the chaps as both are Austrians
Good luck. Most economists are Austrians. Kaynesians have been consistently disproved to the point of it being difficult to argue from their perspective without committing more than a couple logical fallacies.
Selgin does not consider himself an Austrian although his colleague Larry White does.
@@cdsilber Yet Selgin wouldn't deny that he greatly admires and was influenced by Menger, Mises, and Hayek
@@OrthoHoppean Yes he would say he admires them, particularly Hayek. However Selgin would also say he equally admires Milton Friedman and his late mentor Richard Timberlake who were both monetarists. Hence he neither calls himself an Austrian nor identifies with any single school.
@@cdsilber Of course. My point simply being that Selgin is at least a fellow traveler of the Austrian school
Does fractional reserve banking endanger the economy? It's a scientific question.
Does fractional reserve banking amount to fraud? That's a moral question (or at least a question of justice.)
The answer to the first question is disputable...I don't see how the second's answer could be anything other than "Yes".
Is fraud not definitionally based around deceit?
For example, unrelated to FRB... A Ponzi scheme is considered fraudulent, but is that not because the buyer is under the impression that their returns are generated from profit generating assets, as opposed to from new buyers into the fund. If the buyer is aware that they're returns are to be generated from new buyers of the fund, and are aware of the risk that exists buying into such a house of cards, in a free market, is that still fraud?
Another example, Goldman selling MBS's that they would then short without telling the clients who they were selling the underlying MBS to - clearly fraudulent. If the buyer of the MBS was aware it was being shorted, and simply thought that Goldman was wrong and that there was actually likely potential upside from buying said MBS - is that still fraud?
Except that the bank explains what it does to your money under contract and thus there is no legal fraud involved????
lol,,it doesn't exist modern money is digital fiat,, the idea of fractional reserve goe4s back to the gold standard and fixed exchange rates ...which we come off completely under Nixon .
Selgin is being ridiculous. He thinks depositors losing money is desirable in order to get rid of a bad bank but the bad bank is when they mess up lending, not provide inefficient money warehousing. I.e. we can have virtually all banks not lose any money for demand deposits and at the same time get rid of banks who made bad loans and run up a loss.
Selgin doesn't imply it's desirable for depositors to lose money. In fact, in his "The Theory of Free Banking," he includes various way free banking can protect customers from failing banks
Bob was killing it
Fractionaĺ reserve banking is lending money that you dont have and collecting interest , and if no one take loans its dead , it is only creating a debt bubble ,of a dying currency fiat currency
I don't see the argument, fractional reserve banking is factual lying and lending out of someone else's money. Usually without that person's knowledge. It's a thing that should be taught in schools, but, imagine that, it isn't.
Bob Murphy: economic genius. Doesn't know you can use bonds as money.
Why no focus on central banking? I have no issue with private banking having fractional reserve. I am only against the central banks forcing their currency on to the population and enacted a fractional reserve. They are essentially monopolising the currency of the country and running a fractional reserve at the same time. They are not subject to market mechanism.
Both men agree that central banking should be abolished. So that would be a boring "debate."
OK Fair enough.
switzerlands votes at june 10th to end fractional banking completly. its probably not going to pass but lets see the debates in the media etc.
Fraud is fruad no matter how many times you say it is banking
Banks should not be main creators of currency. Major producers of goods and services should credit themselves by issuing vouchers redeemable for their products. That should be our main source of currency - honest monetary system bound to real trade and productivity. It should be left to individual banks to decide if they want to gamble with loans and to what degree, but it should not be our main money supply.
This aged well
Selgin is somewhat on point. They discovered fractional reserves, and it was somewhat beneficial untill this corruption we have now. With bitcoin, we'll discover 100% reserve banking now. There's very little reason to fractionally reserve for the bank service consumer now. It's a serious paradigme shift, as I see it now.
What a joke
Such a dumb question. When it comes to guarding against loan losses, it's the amount of investor capital in the bank than matters (assets - liabilities), not the amount of depositor funds held in reserve. "Libertarians" continue to display their profound ignorance about the very basics of banking.
codediporpal Selgin made this exact point, and he generally is considered a libertarian
Yes, but from a bank's perspective, loans are assets and deposits are liabilities, so the FRB debate is entirely relevant to bank failure.
(Commercial banks' debt-to-equity ratio is usually very high, since banks have a low ROA.)
I am not a economist, having said that, simple common sense tells me that fractional reserve is just like playing in a video game with unlimited credit. It usually does not end well. #gta
Except that there is no "unlimited credit." Banks have to be careful only to increase the quantity of notes close to the demand to hold those notes. If they increase more than demand, the value of the notes will be devalued and customers will go to some other bank, draining their previous banks' reserves in the process and rendering losses. Bank competition is a thing. Competitors will again redeem the issuing banks' excess notes and lead to a drain on reserves and losses. Fears for bank runs will keep bank credit in check.
@@OrthoHoppean if you have 10 and you can lend 90 (that you do not have). Eventually once interests are paid you have let’s say 20 then you can lend 180 etc. Does not it look like unlimited?
@@DoukTube Keep in mind that bank notes are liabilities. If they issue more liabilities than reserves(assets), they risk insolvency. They have to ensure that they always have enough total assets to meet their total liabilities. Should they issue more notes than the public wishes to hold, then the supply of notes will exceed the demand to hold them. The purchasing power of the notes falls. As a result, customers will lose confidence in the notes and will proceed to redeem them. This will lead to drains on reserves and the bank becoming insolvent to the point of bankruptcy. A free banking system would ensure that banks only issue enough notes to meet money demand. Again, any more than necessary and this becomes a problem for banks. There is no central bank to bail them out. There is no "unlimited credit" in a market economy.