Sauvik, why in the case of banking do you uncharacteristicly want to prohibit peaceful voluntary practices? I fear that you don't understand them. The premises on which you found your prohibitionism are false. In fact, (1) Free banks CANNOT issue fiduciary media at will. They have to be prepared to redeem them, which is costly. Read up on Mises' theory of what limits the extent of note-issue under gold redeemability. (2) Under a gold standard, fiduciary media (banknotes, checking accounts) ARE backed by gold. Banks do hold gold reserves to redeem them. They don't hold 100% reserves of gold, but any solvent back does hold sufficient other assets in addition to gold to buy all its liabilities back.
I think he should respond to Joseph T Salerno’s article that I citied in my post of this morning.
However, even on this point of his, I am fortunate to have Doug French, President of the Mises Institute with me today, in an interview to the Daily Bell. I quote:
Daily Bell: We have an interest in free banking here at the Daily Bell. We think any kind of financial system is allowable in a free market and that competition will sort them all out so long as government is not involved — and we do think in a free market that a gold and silver private market standard would evolve as it has historically. Do you think this is an intellectually defensible position?
Doug French: Certainly freely competitive banking is far better than the state-regulated, fractional-reserve, fiat-currency, central-bank-cartelized banking system we have now. However, in practice, in a free market, I don't believe that the market would accept fractional reserves. It would be regarded as embezzlement at best and fraud at worst. Fractional-reserve systems have fallen apart since the ancient goldsmiths issued more gold receipts than they had gold for. I can appreciate the theorizing, but when the rubber meets the road, the sternest task master — the market — would just not allow it.
Fractional-reserve banking depends upon hope and prayer: hope that not everyone shows up for their money all at once and pray that the borrowers pay their loans back. That's not a sound basis for a banking system and requires the force of government to keep it propped up.
Daily Bell: Do you think Mises's position might have evolved toward free banking if he was alive currently? Was Rothbard's position evolving toward free banking before his untimely death?
Doug French: Murray wrote in an article that now is the appendix to his book The Mystery of Banking "Ludwig von Mises was one of those believing that free banking in practice would approximate a 100 percent gold or silver money." Mises believed "that demand deposits, like bank notes beyond 100 percent reserves, are illicit, fraudulent, and inflationary as well as being generators of the business cycle." I believe this was also Murray's view when he passed away.
Daily Bell: Is there anything wrong with fractional-reserve/fiat money in a free-market environment?
Doug French: You couldn't have fractional reserves and fiat money in a free market. It would not last one day. Fractional reserves require a central bank to cartelize the banking system. In a free market, demands on deposits would instantly shut down banks who engaged in fractionalized banking by lending out their customers' deposits.
No one would accept paper money with no backing but for the power of government to require people to accept it through legal-tender laws.
I rest my case.
there is a further rejoinder by Steve Horwitz: ->banning fractional reserve system would be a step forward in a world where central banks still exist.if they dont, then let the market decide if it wants to keep the fractional reserve system or discard it.imo,it will survive -though it will mostly be very close to 100% reserve.
ReplyDeletegoing by that logic,should we ban electric utility companies that promise you power all the time,but the reality is that if everyone on the grid tried to switch on at the same time, there will be massive failure. similar to capacity planning done in mobile coverage determination,it is common to use some sort of queuing mechanism for scarce resources.money should not be an exception.
i am with prof white on this one.
Sauvik,
ReplyDeleteI have now commented on Salerno at some length on my blog+: http://divisionoflabour.com/archives/007130.php
Doug French is confident, from him armchair, that fractional-reserve banking would fail a real free-market test. I wonder whether he's aware of the historical cases of near-laissez-faire in which FR banks did survive and prosper. See Kevin Dowd, ed., The Experience of Free Banking. I predict that it can do so today, without deposit insurance or any other props. I suppose to resolve this finally we need to put laissez-faire banking to the test. Let's try it!
I think all readers of this debate will benefit from a reading of this "Islamic Judgment on Paper Money." It is simple and easy to understand. I clearly points out fraud:
ReplyDeletehttp://www.shaykhabdalqadir.com/content/articles/Art029_04112004.html
Sauvik,
ReplyDeleteI'm no economist but an engineer, I've been reading your articles on the need for sound money whose value cannot be altered by human intervention. Yesterday's livemint article confused me in this respect -
http://www.livemint.com/2010/05/11211415/Indian-lessons-for-Greece.html
"But liquidity support was only the beginning. One of the first steps Manmohan Singh took after he became finance minister in 1991 was to devalue the rupee to make the economy more competitive. A flexible currency policy is important in a crisis because it allows economies to adjust. Even subsequent crises, such as the one that rocked Asia in 1997, showed that countries running fixed exchange rate regimes were needlessly painting themselves into a corner. Greece has outsourced its monetary policy to the European Central Bank and cannot devalue its currency because it does not have one."
What can you say about it?
@Vishy: That article is about fiat paper money, not "sound money," which is gold, something beyond human interference, which is why governments hate it.
ReplyDeleteI suggest you read the chapter on sound money in my e-book "Natural Order" available on the right-hand bar.
But if the gold standard is used, devaluation as suggested by the author of that article cannot be done to avoid a part of the greece debacle?
ReplyDeleteThanks for the pointer.
@Vishy: The Greek debacle has been caused by excessive government spending. Under a gold standard, spending by the government is strictly limited to tax revenue. The "creation of money out of this air" is impossible. This is good for the citizenry - which is why all "predatory states" hate the gold standard. None of the economic crises that plague us today could have occurred if gold was money and money was gold.
ReplyDeleteNote that the "islamic judgment on paper money" referred to earlier says that, under Islam, the only legit money is the gold dinar coin and the silver dirham coin.
Hulsmann's biography of Mises says that, late in his life, Mises felt that gold and silver coins were best, and if ordinary people got accustomed to using them in their everyday transactions, they would be cured of the illusion that paper is money.
Actually, paper is just a money substitute.
Hope that clears things even further for you.
re: islamic views on fiat money. it is a travesty of these sound views that today clerics in dubai can be bribed to issue a fatwa on the myriad debt /derivatives that bankers conjure up -and pronounce them shariah compliant.
ReplyDeleteI don't see how FR can operate except through deception. Why would someone accept at face value a $1 paper note that is only backed by $0.9 in actual assets, unless he was deceived into thinking that the $1 note represents $1 of assets?
ReplyDeleteDsylexic: with a utility company that is an SLA, an entirely different issue from creating money out of thin air!
If clearly disclosed as such and run without deception, sure FR systems could be tried in a free market, but who would voluntarily use a currency whose value is indeterminate? What would be the point of it?
Maybe a good way to part Keynesian suckers from their money without deception! Them being the only ones who'd be dumb enough to put their money in an openly FR bank.