This archived content originally appeared at Freebanking.org, the predecessor site to Alt-M.org, and does not carry the sponsorship of the Cato Institute.

A Theory of Banking Made Out of Thin Air

Instances of self-styled Austrian economists bungling their banking theory seem almost as common these days as instances of theologians bungling their cosmology were six centuries ago.  One such instance, by the Cobden Centre's Sean Corrigan, occurs in the course of a long and meandering series of posts inspired by a four-way debate he took part in, with yours truly attending, at Oxford's Divinity School this May:

[I]magine that I take your IOU to the bank and that [sic] peculiar institution registers my claim upon its (largely intangible) resources in the form of a demand liability of the kind which–by custom, if not by legal privilege–routinely passes in the marketplace as money. Your promissory note–a title to a batch of future goods [sic] not yet in being–has now undergone what we might facetiously call an 'extreme maturity transformation' which it [sic] has conferred upon me the ability to bid for any other batch of present goods of like value without further delay. It should, however, be obvious that no such goods exist since you have not had time to generate any replacements for the ones whose use I, their [sic] lender [sic], supposedly forswore until such a time as your substitutes are ready to used [sic] to fulfil [sic] your obligations, something we agreed would be the case only at some nominated [sic] point in the future.

More claims to present goods than goods themselves now exist…and thus the actions we may now simultaneously undertake have become dangerously incongruous [sic]. Our [plans] have become instead a cause of what is an inflationary conflict no less than would be the case if I had sold you my place at the head of the queue for the cinema only to try and barge straight past you in a scramble for the seat in question.

Even setting aside the typos and malapropisms, Corrigan's prose isn't likely to inspire anyone to twine a garland around him for his lucidity.*  But one thing that is clear is that the bank lending that he has in mind involves three parties only: the banker, the borrower, and a debtor whose IOU to the borrower serves as the borrower's collateral.   For the sake of concreteness, let's call them the banker, the miller, and the baker; and let's imagine further that the miller, having offered the baker a ton of flour in exchange for a $101 30-day promissory note, uses the note to secure a $100 loan from the banker.

According to Corrigan the loan thus secured is inflationary because it allows the miller to take part in the "scramble" for present goods, even though he got the loan in exchange for "a title to a batch of future goods not yet in being."  In fact a promissory note or IOU isn't a "title" to anything, much as Austrians may like calling things "titles" that aren't such.  It is, well, a promise to pay.  And it is a promise to pay, not goods, but money.  Let us grant, nevertheless, that the note in question stands for goods–loaves of bread, for instance–that have yet to be produced or put on the market, the presumption being that bread will only eventually be made from the flour that was exchanged for the promise, to be put on the market at some still later date.  Consequently the loan, and the extra demand for goods that it unleashes, instead of coinciding with an increase in the supply of goods, anticipates such an increase, and to that extent seems bound to raise prices.  Bank lending appears analogous to creating fake "tickets" to an already fully-booked performance, allowing the new credit recipients to secure present goods, despite a lack of voluntary savings, simply by bidding goods away from others, that is, by forcing others to consume less, just as holders of fake tickets might take up seats that ought to have gone to holders of legitimate ones.

But the appearance is deceiving, for it depends crucially on Corrigan's having failed to consider all of the parties that usually take part whenever a competitive bank makes a loan.  To see this, we need only consider our imaginary banker's fate if he makes the loan in question without anyone's cooperation save that of the miller, who is supposed to repay the loan, and the baker, whose IOU secures the loan in case the miller defaults.  The banker's fate hinges on the fact that bank borrowers borrow money, not to hold, but to spend.  So once our miller has $100 credited to his account, he uses it to purchase wheat or other supplies, or to pay his workers, or to settle accounts due–in short, to make whatever payments he cannot afford to put off making for another 30 days–payments that compelled him to borrow money in the first place.  So the miller writes checks, and writes them quickly, to the tune of $100.  And those checks are paid to persons who, if the banking system is competitive, are likely to deposit them in rival banks.  Those banks in turn return the checks for payment, directly or through a bank clearinghouse.  So by lending $100 to the miller, the banker generates $100-worth of claims for immediate payment against his institution.  Those claims, it goes without saying, cannot be settled directly using the baker's promissory note, which has yet to mature.  They must be settled in cash, which means that the bank must either have such cash on hand, or fail.

If the bank fails, it obviously hasn't been able to get away with creating credit "out of thin air," and presumably there will not be many banks rushing to replicate its irresponsible behavior.  If, on the other hand, the bank has the cash needed to avoid failing, the obvious question arises: where does the cash come from?   Two answers suggest themselves.  One is that it comes from the bank owners themselves, that is, from capitalists.  The other is that it comes from persons who deposited it with the bank, presumably in return for services or a share of its interest earnings or both.   In either case, it should be apparent that a competitive bank cannot lend, or rather that it cannot lend and profit by it, unless it has, or quickly gets hold of, cash reserves at least equal to the amount of the loan.  That means, in turn, that for a bank to lend someone has to have engaged in prior voluntarily saving, by refraining from spending or from otherwise cashing in their own claims against it.  Our banker cannot, in other words, simply create loans out of thin air, and thereby drive prices upward.  Instead, if his business is to survive he must act as a go-between or intermediary, lending to the miller only what he has induced others to lend to him.   These ultimate suppliers of bank credit, by refraining from consuming, place downward pressure on prices precisely equal to the upward pressure stemming from the banks' lending. By airbrushing them out of his account of the workings of a typical bank, Corrigan succeeds in painting a picture of the banking business that's as misleading as it is lurid.

All this, of course, refers only to ordinary commercial bankers–bankers who must do business the hard way, by competing head-on with dozens if not hundreds or even thousands of more-or-less equally privileged rivals.  It doesn't apply to central bankers who, by being able to print-up arbitrary amounts of their economies' ultimate cash reserve asset, are indeed capable of making loans "out of thin air," without having to struggle to first gather funding from others.  This distinction is what gives central bankers their extraordinary power to do either good (as their proponents imagine them doing) or harm (as they tend to do, more often than not, in fact).   By suggesting, in short, that there is no difference between the credit-creating capacity of ordinary commercial banks and that of central banks, accounts like Corrigan's do a great disservice, by making it harder for people to recognize the unique threat posed by today's monopoly suppliers of irredeemable paper currency.

Addendum (8/12/13): A correspondent has alerted me to this post, accusing me of having joined Paul Krugman and others in making a "sport" of bashing Austrian economics, and suggesting that I have failed in the post above and elsewhere to recognize the difference between demand and savings deposits, only the last of which (according to the Austrians I criticize) represent true savings. In fact, the distinction in question is absolutely irrelevant to my argument above, the point of which is that a competitive bank cannot get away with creating credit out of thin air. Instead it can afford to lend only to the extent that others save with it. Whether the savings come to a bank in the shape of "demand" or "time" deposits matters only to the extent that it influences the length of time for which the savings in question are likely to remain at the bank's disposal. The bank is responsible for limiting its credits to amounts consistent with the total extent of credit supplied to it by its liability holders, allowing also for the timing of withdrawals. A banker that misjudges the timing in question exposes his bank to the same risk of failure that confronts one who attempts to extend credit without having received any prior deposits. So whether a bank derives its funding from demand or from time deposits, the conclusion stands: if the bank is to survive, the bank's lending must be limited to the amount of real savings it has on hand.

As for my being just another anti-Austrian economist, that's a calumny: I am a fan of Austrian economics, as embodied in the works of such great Austrian pioneers as Menger, Mises, and Hayek, as well as in those of many living members of the school. What deserves to be ridiculed is the unending tide of junk written, mostly on the internet, by people who label themselves "Austrian economists" despite appearing to know only as much about economics as I know about string theory, which is to say, next to nothing.
________________________________

*Some of Corrigan's more florid passages read as if concocted by tossing one copy each of Finnegans Wake, Sartor Resartus, and the Communist Manifesto into a blender and hitting "Pulse" once or twice.  Consider: "Among other enormities, the fact that production must necessarily precede consumption and that it is the first which comprises the creation of wealth and the second which encompasses its destruction, was far beyond the ken of the spoiled Bloomsbury elitist who exhibited a life-long contempt of the aspirations and mores of the bourgeoisie and who hence imagined that policy was at its finest when, like an over-indulgent aunt, it was pliantly accommodating the otherwise ‘ineffective’ demand being volubly expressed by the old dame’s petulant nephew as he stamped his foot in the tantrum he was throwing up against the sweet-shop window." When I encounter such prose I cannot quite decide whether to throw up a tantrum myself, or simply to throw up.

  • BillWoolsey

    The problem with Corrigan's approach is that he assumes the banker's IOUs circulate as money.

    Selgin's response answers that question implicitly. They circulate as money because they are accepted by other banks for deposit and net balances are cleared.

    More fundamentally, the banker gets the IOUs to circulate by promising to redeem them with other types of money.

    Indirect redeemability are approaches that generate a contract that maintains the purchasing power of the money while making it formally redeemable in something that does not serve as money.

    Hayek's competing fiat currencies proposed the same thing without any contract. The banks just have a policy of maintaining the purchasing power of the IOUs by limiting their issue.

    And, of course, what is the limit of the issue? The demand to hold these IOUs. This is true regardless of how the contract is enforced.

    A central bank can be analyzed in the same way. Subject to redeemability with some other form of money, perhaps foreign exchange. Or some sort of indirect convertibility can be required. And finally, it could be some kind of "rule" imposed on the central bank to maintain purchasing power. In all cases, the limit on issue is the demand to hold the liabilities.

    While in a competitive system, the practice of first receiving deposits and then making loans seems sensible, a better approach for the individual banker to seek to make loans simultaneous with deposits. Both sides of the balance sheet should grow (or shrink) together at the same time.

  • VangelV

    We can argue about the various details, assumptions, and nuance until the end of the world and not get anywhere. It makes far more sense to look just over the horizon and see what the 'self-styled Austrian economists' seem to be looking at. They make it clear that according to their assumptions and logic the fractional reserve banking system is very unstable and unworkable no matter how everyone claims to want to cooperate. If they are right we will see a major problem that will require massive intervention by governments to salvage the banking system as we know it or we will get an outright destruction of the system as we know it. George seems to believe that the system is far more stable than they do and workable over the long term. Some time in the next decade we will see which side of the argument is correct and even though many exhibit some flaws I would rather be on the Austrian side of this argment.

    • George Selgin

      Whether fractional reserve banking is stable or not, it serves no one's interest to misrepresent precisely how it works.

      Moreover, though the p;oint is tangential to that of my post, your suggestion that we must "wait and see" to determine whether fractional reserve banking can be stable ignores the fact that we already have over 300 years of experience we might consult on the matter–experience that includes plenty of evidence of systems that were both stable and long-enduring.

      • VangelV

        But that is my point. We have experience showing us that fractional reserve lending and fiat currencies are not very stable. (Why exactly do you think that governments forced us to move to a fiat system and created central planning bodies in the first place?)

        If 20% of depositors wanted to remove their money out of the system could the banks survive? The average person thinks that savings are available to them in a timely manner. But no matter how you like to dress up the narrative we all know that they aren't. Depositors will wind up losing much of their deposits per the Cyprus bail-in plan or wind up losing purchasing power as the currencies move towards their intrinsic value as paper.

        The banks are now leveraged to the hilt and resemble hedge funds. That happened because the system was not very stable due to regulatory capture and the use of government power to prevent the free markets from doing their jobs. There is no way for any convoluted reasoning to justify this obvious fact.

        Now I readily admit that I am an engineering type who has not spent a lifetime trying to study banking and have no experience in pretending that I know much about banking. But that is a problem that I see. I note that many of you theorists are pretending that you know what is going on even as you are quite ignorant of reality. From my perspective I see the financial system imploding because it does not work the way that you say it does and isn't nearly as stable as you think it does. It would not surprise me if governments attacked gold once again as they prevented their currencies from becoming irrelevant and worthless. But I suspect that those that tend to side with some of your opponents on this thread will see that their physical holdings of real money that can't be created out of thin air will protect them from the inevitable losses that are coming our way. If you cannot see the bond and currency bubbles and do not understand how unstable the system is how are your students supposed to trust what you are teaching them? Are your positions any different than theological positions that are supported by a sound logical structure but built on a foundation of sand?

  • ShaneCRoach

    This is ridiculous. The very point the cited discussion makes is that the money we use today is all IOU's. There is no distinction between the promissory note and the loan any longer. Our promissory notes are redeemable in cash, itself balanced on the books by more promissory notes (Federal debt for the most part in the USA).

    You then propose to explain the error of his assertions by first refusing to acknowledge the actual argument he makes.

    My question is, who is it you think you're kidding? If I, a relatively unchurched student of economics basically grasping at straws to find out what is going on because the usual media outlets refuse to cover this issue with any particular accuracy, can see through your obfuscation, anyone can.

    As for VangelV's statement, how many bank bailouts have to happen before you realize the debacle you say we are waiting to see is precisely what keeps happening. Sure you can patch it back together again and watch it fall apart over and over… What's the point in that though?

    The weakness of the original argument is that the inflation is not caused by the credit based medium of exchange. The inflation is caused by the fact that the manufacture of the credit has been limited to institutions who make their profits by charging interest in that credit. In order for there to be enough credits then to repay the originally offered credit with interest, we must constantly introduce more credit. There is no way out of this cycle. It is built into the current system. It has nothing to do with any manufacture of demand on current supplies that takes place because of the artificiality of the credit.

    • George Selgin

      Alas, you have me here: I'm no match for your powers of penetrating obfuscation.

    • http://ralphanomics.blogspot.com/ RalphMusgrave

      Shane,

      It is not correct to say that banks are “institutions who make their profits by charging interest….”. They make much of their money by charging for the ADMINISTRATION COSTS involved in making loans, issuing cheque books, processing payments by cheque and plastic cards, and a dozen other activities.

      As to INTEREST, I have shown at the link below that banks AS SUCH do not charge interest: they simply pass on to borrowers interest which banks themselves have to pay their creditors (depositors, etc).

      http://ralphanomics.blogspot.co.uk/2013/08/banks-dont-charge-interest.html

      Moreover, even if banks did charge interest, that money gets paid to bank staff, shareholders, etc. I.e. it gets RECYCLED. So there is no need, as you put it, to “constantly introduce more credit”.

  • http://wcoats.wordpress.com/http://works.bepress.com/warren_coats/ wcoats

    George,
    I agree with your points. But to be fair to those who like to stress that banks lend by creating deposits (a misguided and unhelpful characterization of the economic calculus made by banks in my view), the few who seem to actually understand the monetary process acknowledge that their story assumes and depends on central banks supplying the reserves needed to rationalize the credits created. They have half a point. Central banks that peg interest rates (rather than just using them as an operational target for controlling the money supply) will supply whatever reserves are needed by banks at that interest rate thus allowing banks to create whatever credit/deposits they think will be profitable. Of course this blows up as inflation drives rates up.

    I am, however, attracted to some version of the Chicago Plan (100% reserve banking).

    • ShaneCRoach

      You can't get out from under inflation without breaking the cycle of dependency on money itself. If there is to be any interest at all on loans, that interest needs to be payable in commodities or services other than money. Otherwise, you have to create more money to pay off the debts. This may not be immediately apparent to some, but the simple fact is that if we stop talking in individual terms and look at money as it relates to trade on the macroscopic scale, you cannot escape that usury is a bad thing.

      This is not merely some Christian/Jewish?Muslim religious conceit. Take whatever you want to use as money. divide it into 100 units. Say banks have 10 of those units. They lend at interest, and if those loans come back with interest it requires that banks gain a larger and larger percentage of the money there is until eventually they control virtually all of it. In order to make any use of their system after that they then have to create more money and introduce it somehow in order to pay the interest on any new lending. From there on, constant inflation ensues. Not that the banks and their cronies would care, since the system gives them substantial central control over the entire marketplace due to their control of where money is injected. They simply refuse to make loans to those whose endeavors they wish to see fail.

      Again, banking as it exists now simply needs to be done away with. Brokers need to be the dominant force in the economy, not moneylenders. Brokers enable others to realize their own goals. Bankers saddle people without means with further burdens in order to have even a chance of realizing their own goals.

      Brokers can offer to either broker deals for a percentage of each trade, or they can offer personal credit to anyone willing to consign goods over to them, and that credit then can be used to buy anything the broker deals in. Different brokers or brokerage houses can trade each others credits, and interest need never be introduced into the system.

      This system can also deal with speculation, which I believe is falsely demonized for problems that actually stem from people's ignorance of how money works to begin with. It is perfectly rational for people to offer to buy something at some future date at some specific price, and for their "credit" as it pertains to the perception of their reliability to suffer if they fail to meet that obligation. Speculation is not the problem. Many people want to deal with speculation because they believe it is inflationary, when the reality is inflation is a function of a money system run based on the universal control of the money supply by an industry that requires usury to survive.

      Banking, even at 100% reserve, does not cut this cord. It has not worked, and it will never work. It is physically impossibly for it to work any differently than it demonstrably has worked every single time it has ever been tried. Free banking, central banking, some combination of the two — it makes no difference. If money is to be circulated through interest bearing debt, it will eventually either begin to result in inflation of whatever credit is being circulated in this manner through some practice at the very least similar to partial reserve lending, or deflation will increase steadily until some crucial amount of the money is controlled by the central authorities and the free market ceases to exist at all.

      The more dependent any economic system is on modern and the immediately pre-modern banking practices, the more unstable it will become. It is unavoidable. We are centuries past a healthy free market economic model and with no easy path forward to re-establishing one. We are going to have to chart a new course. Banking has proven to be a dead end.

      • VangelV

        "I am, however, attracted to some version of the Chicago Plan (100% reserve banking)."

        I am sorry but I do not know of any Chicago Plan that requires 100% reserves. That is more Rothbard than Friedman.

        • Justin Merrill

          VangelV,

          Your ignorance of the subject doesn't make you right. There is a long history of full reserve proposals from the Chicago School before Friedman. Unlike the Rothbard version, which supported full reserve banking in the form of a commodity money on moral grounds, the Chicago Plan supported state backed fiat full reserve money. Irving Fisher was an early proponent but was discredited by the Great Depression so the other Chicago School members (Lloyd Mints, Henry Simons, Frank Knight etc) conducted a study during the late 30s for a proposal of reform that was not adopted.

          I don't like the Chicago Plan, but the fact it was supported by some powerful minds means it shouldn't be written off as kooky without serious consideration. I think one of the finest critiques of the idea was written by Clark Warburton.

          • VangelV

            "Your ignorance of the subject doesn't make you right."

            Please enlighten me. Provide a reference to the, " the Chicago Plan (100% reserve banking)." If you can't do that it may not be me who is ignorant of the subject. I can certainly tell you that Friedman opposed 100% reserve banking, opposed a gold standard, and had no objection to central banks creating purchasing power out of thin air. Or that Rothbard, who Dr. Selgin seems to have a huge problem with, supported 100% reserve banking, supported a real (market chosen) gold or hand money standard, and wanted the market to create money instead of a central bank. The trouble for you is that it is the Austrian, not the Chicago School that is best known for supporting 100% reserve banking.

        • http://ralphanomics.blogspot.com/ RalphMusgrave

          There is Irving Fisher’s booklet: “100% Money and the Public Debt”. Fisher was a member of the Chicago school. Plus numerous present day advocates of full reserve banking or 100% reserve banking claim their ideas are largely the Chicago school’s ideas re-presented. E.g. this lot:

          http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

          or:

          http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

          • http://vikingvista.blogspot.com vikingvista

            The first link is just the usual panoply of misconceptions an historical inaccuracies that has been definitively and repeatedly debunked by the owners of this blog.

            But the second link, I find a little surprising. Even Fisher believed commercial banks just arbitrarily created deposit accounts for bank loans? Is it possible that in his long illustrious career, the great Irving Fisher never gazed upon the balance sheet of a commercial bank?

          • VangelV

            The first link says nothing about the Chicago school or its ideas. The second points out that Fisher did want 100% reserves for checking deposits, something that even Friedman supported. But the Chicago School has rejected the idea of 100% reserve banking. Friedman even called for a steady expansion of the money supply that was not backed by real reserves and believed that when the link to the dollar was removed from gold it would fall in price that reflected its use as a dental material. He did not care for real reserves and was happy with the currency being backed by treasury debt.

            Compare this to the Austrians. The Austrian School does not just have the late Dr. Rothbard to point to but can show plenty of its members today that hold that exact same view. I think that this is why Dr. Selgin is so hostile to the Rothbardian views; as more and more of the Austrian predictions come true the position that he supports begins to look more and more undependable and undefendable.

          • http://vikingvista.blogspot.com vikingvista

            "I think that this is why Dr. Selgin is so hostile to the Rothbardian views; as more and more of the Austrian predictions come true the position that he supports begins to look more and more undependable and undefendable."

            I suspect his hostility has more to do with the fact that Rothbard's notions of fractional reserve banking are transparently factually and semantically false.

  • Mike Sproul

    George:

    It's good to see that you understand the real bills doctrine as it applies to ordinary commercial bankers. Now if only you could see that it applies just as well to central bankers. Just as the miller's IOU is usable as money and backed by the miller's assets, the Fed's IOU is usable as money and backed by the Fed's assets. Neither of them creates money out of thin air.

    • George Selgin

      I'm afraid you read into my post something that it comes close to contradicting. I conceded only, for the sake of argument, that the promissory note represents goods in the making. But I also granted Corrigan's conclusion that, were it merely a matter of granting credit "made out of thin air" on the basis of such a note, the credit would be inflationary. It isn't the "backing" of the loan that m akes it non-inflationary, but the fact that the bank lends funds that others have refrained from spending. A loan funded through prior savings might be non-inflationary even if it were unsecured by any collateral, whether "real bills" or otherwise.

      • Mike Sproul

        1. Corrigan’s conclusion was incorrect, and you shouldn’t have granted it. No banker lends without a reasonable expectation of repayment. Goods-in-process give just such an expectation. If they didn’t, the lender would have demanded additional collateral. Thus bank-issued money, whether in the form of notes or deposits, is backed by the assets of the issuing bank.

        2. A bank might initially have a total of 100 paper dollars of ‘prior savings’ on deposit, against which it issues 100 checking account dollars to the depositor. If the bank then lends the $100 of prior savings to the town drunk, its assets will fall to zero, but its depositor still holds 100 checking account dollars. These checking account dollars will be unbacked and therefore worthless. I doubt very much that you meant to say that such a loan would be non-inflationary. If you did mean that, you have some re-thinking to do.

        3. Returning to the situation where the bank has 100 paper dollars on deposit, a miller might offer the bank a $202 30-day promissory note, while asking the bank for a $200 loan. The bank can credit the miller’s checking account with $200, thus making a $200 loan even though it had only $100 of prior savings. That $200 might reflux to the bank the next day, but it might also stay in circulation, or be redeposited into the account of one of the bank’s other customers. The bank is clearly capable of lending without having ‘prior savings’. The bank has, in effect, coined the miller’s promissory note (or the goods it represents) into money.

        4. Sean Corrigan has written at least 5 attacks on the real bills doctrine that I know of. I mention this on the off chance that it might jar you into the realization that the enemy of your enemy is your friend, and might even inspire you to switch sides and fight for the good guys for a change.

        • George Selgin

          Sometimes the enemy of your enemy is your enemy!

  • Michael

    Thank you for calling Austrians on their propensity to call things by the wrong word, helping themselves and their audience to lose sight of the wealth of actual meanings of words. Examples are numerous, from calling all sorts of claims “titles,” to calling money a “claim,” to calling a seller a “lender,” to calling the honest and fully-disclosed practice of fractional reserve banking “fraud,” and on and on. It reminds me of the Vienna Circle’s proposal to ignore the actual distinctions of meanings in language in favor of their own definitions, and it has the same over-simplifying and dumbing-down effect. Is there something in the water in Austria?

    In fact, what Corrigan bemoans in the transaction between banker and miller (to use your terms, George), has already happened in the transaction between miller and baker, which Corrigan apparently (and correctly) finds innocent. The so-called 'extreme maturity transformation' occurred when the baker obtained the present good flour for his IOU-in-the-future. What occurred later when the miller obtained a deposit account for that IOU is no different. The miller and baker expanded credit and allowed prices to be higher than they otherwise would be. Sellers of goods and services have and exercise the ability to expand credit – and cause price inflation — just as much as any commercial or central banker. There is no need for prior “savings.” To the extent that people in the market consider IOUs-in-the-future to have present value, they will have their effect in the market, and holding them will count as holding “savings.” And it makes no difference (on this point) whether the IOUs are to pay money or to deliver goods or to perform services.

  • Paul Marks

    To loan money you should first have the money you are loaning – either the REAL SAVINGS of yourself, or those of other people (entrusted to you). Also you must accept that once you have loaned the money (which should mean the money physically leaving your place of business with the person you have loaned it to) you do not have the money any more, and you do not have the money till when and IF the loan is repaid.

    Anything else is not honest money lending (or the economics or money and banking) – it is double talk and jive.

    • George Selgin

      I quite agree; but it was precisely my point that commercial banks generally do lend real savings, unless they are responding to the creation of new reserves by a central bank. And that's no jivin'. Dig?

  • Paul Marks

    Whether the money is freely valued commodity (such as gold or silver) or government fiat notes (whose "value" comes from legal tender laws and tax demands) it TECHICALLY need not leave the place of business of the money lender (whether this money lender is called a "banker" or not should be irrelevant) – if the money (the physical money – be it a commodity or government fiat notes) is clearly designated as now under the control of the borrower NOT the savers (be they the money lender or people who have entrusted the money lender with their savings) i.e. the money lender no longer has the money.

    However, in practice, this idea (of lending the money out whilst keeping the physical money in the place of business of the money lending invites abuse – and the arguments for it "the gold coins might damage your pockets", "you might be mugged in the street" (or whatever) are dubious. Electronic transfer of ownership should be matched, as soon as is practical, by the physical moving of the physical money.

    One of the great abuses is (of course) the confusion of money and credit – hence such terms as "broad money" (banker credit bubbles).

    Whilst it is true that a credit bubble economy (a capital structure this twisted by malinvestments) ON THIS SCALE can only exist with government intervention (massive government intervention) bankers are quite capable of economic distortions (on a more limited scale) without government aid. In short boom-busts can (on a limited scale) occur without government intervention.

    The golden rule (no pun intended) should be that for every Dollar (or Pound or …..) of lending there must be one Dollar of REAL SAVINGS – and that money (the physical money) must be transferred from savers to borrowers.

    There is no such thing as a free lunch (something Milton Friedman was fond of saying – but sometimes forgot in practice), a banker can not "create money" – "broad money" (what bankers may honestly and sincerely regard as money) is just, in the end, a credit bubble – and all bubbles must pop. Unless (of course) government steps in with its printing press to create physical money to support the bank credit (and this is not a good thing either – banks who engage in "credit expansion"[either individually or with the "this is just the way the system works – the way that banks interact with other banks" EXCUSE], i.e. lending out money that does not actually exist, should be allowed to go bankrupt not bailed out either openly or in hidden ways).

    "But more than 90% of money is broad money – it has no physical existence".

    That is not my fault.

    Bankers, governments (and academics) may believe that the figures on their computer screens are a good thing – but they are not a good thing.

    Computers do not really, fundamentally, change matters – in the old days it was ink in ledger books.

    If the ink in the ledger books did not represent real money (physical money) then there was a bubble, and it is the same with the figures on the computer screens.

    • George Selgin

      Of course if banks lend at all, the sum of their liabilities must exceed the sum of their reserves, whether the lending reflects real savings or not. Your suggestion that lending can only be limited to real savings by keeping bank cash reserves = bank liabilities obviously begs the question. Limiting lending to prior saving isn't the same as limiting it to zero.

      Suppose a gold standard. I deposit a 100oz of gold coins at my bank and say "Here, lend these if you like but be prepared for me to ask for them back." The gives me 100oz in its (circulating) IOUs, and it lends 90oz, consequently parting with that much gold. At that point its balance sheet shows 10oz of gold backing 100oz of liabilities. Yet it has not lend anything save part of what I first lent to it. In insisting otherwise, you reveal a lack of understanding of what it means for a bank to serve as an intermediary between (ultimate) lenders and borrowers, offering in its place more of the sort of "thin air" banking theory to which this post responds.

      • ShaneCRoach

        If you lend the physical gold, he thinks that is going to prevent the re-lending.

        You rightly point out this is not the case but continue to ignore that there is nevertheless the problem of re-lending. Anyone who has half a clue about banking sees you are not addressing this issue. This is quite obviously what causes inflation and eventual "correction", "bubbles", or whatever else you want to call it when the fatally flawed system implodes due to it being openly and obviously unworkable.

        He is referencing the money multiplier, if you absolutely must have someone use bankspeak in order to recognize a concern for what it is. The lent money is not distinguishable from the deposited money. When deposited, it represents an entirely new asset when it is not in fact any such thing.

        When re-lent, it increases the money supply. You, I, and everyone who has half a clue what's going on understands that. Why do you keep hemming and hawing rather than addressing that issue? If you want to argue that as an asset the lent funds should be legitimately available for re-lending if someone feels they can make enough to cover their debt plus interest, fin. Argue that. Don't IGNORE it.

        Remaining constantly unanswered by you or anyone else I have yet to see or hear though is that, again, if you allow the lending of anything at interest, it is necessary for one of two things to take place. Either the money gets paid back with interest, resulting in a slow collection of the base asset in the hands of a very few people, or else the "asset" must to some extent be a pliable, conceptual thing that can be increased and reintroduced into the economy, in which place you have to account for that addition and discuss OPENLY who is to be in charge of it.

        Most people do not trust huge corporations to do any such ridiculous thing. More and more people are coming to realize that huge corporations and the government cooperate more often than they oppose one another. The idea that "deregulation" gets the government out of the way reads to the vast majority of people as handing the authority off to the banks themselves, and no one is interested in doing that.

        This is why this concept does not sell. You need to discuss how it would be regulated rather than passing it off as "deregulation" or "free banking".

        • http://vikingvista.blogspot.com vikingvista

          "The lent money is not distinguishable from the deposited money."

          Probably because it is the exact same money. The money the depositor loans to the bank is, down to the atom, the same money the bank loans out to borrowers (less the reserve).

          "When deposited, it represents an entirely new asset when it is not in fact any such thing."

          An interest-bearing loan accessing someone else's future income streams *is* quite a different asset than the loaned money. Otherwise, the loan would not have taken place.

          Your criticisms are criticisms of debt investments–they are criticisms of debt itself, although perhaps limited to a certain scale or complexity.

          • ShaneCRoach

            That's why I said, "If you want to argue that as an asset the lent funds should be legitimately available for re-lending if someone feels they can make enough to cover their debt plus interest, fin. Argue that. Don't IGNORE it."

            Why are you repeating that I am arguing what I say I am arguing? Do you have some defense for further deregulating the re-lending of the same base asset repeatedly at interest without heavy government oversight as is proposed by free bankers?

          • http://vikingvista.blogspot.com vikingvista

            Shane,

            "If you want to argue that as an asset the lent funds should be legitimately available for re-lending"

            How can it not be? Are you suggesting that a person in debt be forbidden from loaning any of his money?

            "Why are you repeating that I am arguing what I say I am arguing?"

            Why are you ignoring my counterpoints?

            "Do you have some defense for further deregulating the re-lending of the same base asset repeatedly at interest without heavy government oversight"

            I have no defense for a government forcibly preventing a person from loaning his property just because he has incurred some debt somewhere.

          • ShaneCRoach

            "How can it not be? Are you suggesting that a person in debt be forbidden from loaning any of his money?"

            I am contending that banks not be allowed to lend money they simultaneously make available for withdrawal by the supposed lender. I would have thought that that would be fairly obvious by now.

          • http://vikingvista.blogspot.com vikingvista

            ME: "How can it not be? Are you suggesting that a person in debt be forbidden from loaning any of his money?"

            DU: "I am contending that banks not be allowed to lend money they simultaneously make available for withdrawal by the supposed lender. I would have thought that that would be fairly obvious by now."

            You mean like insurance companies? If only it were obvious to you that you are in fact wanting to forcibly deny an indebted person (e.g. a bank shareholder) the right to loan his property. The repercussions of such a strict debtor/creditor forced separation, if consistently applied, would be fascinating, if horrifying, to see. At any rate, I'm confident the disaster would be abrupt enough that no political climate (excepting perhaps one like North Korea's) would be willing to long endure it.

            Your qualification of lender with "supposed" illustrates a further mental block. There is no imaginable way that a holder of an interest-bearing deposit can NOT be a lender.

          • ShaneCRoach

            To quote myself from a different post I think in response also to you – "If someone deposits money into a bank and the bank provides that it will be available on demand, then the bank (and by extension its shareholders) does not have any right to lend it. I wish people would take your advice and just yank their money from the banks in order to demonstrate to you (again) that there is nothing underlying all of this money that allows for the banks to repay what they have guaranteed to pay."

        • Justin Merrill

          Shane,

          You suffer from a handful of misconceptions that are commonly repeated in the dark corners of YouTube and GreenBacker circles. Interest is not mathematically problematic. Interest is a flow, which is paid out of another flow (income). Debt is a stock with corresponding assets which generate income. It is a fallacy to say that "not enough money is created to repay interest+principle" because each dollar can be spent multiple times.

          Also, interest does not accumulate to the bankers in the way you imagine because they have to share their profits with creditors (depositors). If they don't offer a competitive rate they will lose their source of funding and have to liquidate their assets.

          • ShaneCRoach

            Interest might not be as problematic if it were not being required on a singular commodity or asset required by law for payment of taxes and debts.

            The math really just doesn't lie. You can conflate the multiple streams conceptually and see that they can never do anything to keep whatever you are using as money from pooling. There is x amount of whatever you are using as money. Divide that into 100 portions. Allow people to lend it at interest. Sooner or later, someone is going to get their interest and someone is not, and eventually the ones best at getting their interest get a corner on the market.

            It really is quite physically impossible for it to turn out any other way. If you would like to point out an actual study of some sort that demonstrates this is not the case, I will be happy to read it. These discussions rarely get to this point, it is true, but that doesn't mean the point is not an important one. It just means some people have a deeply vested interest in pretending it is not at all important.

            If it's not important, I should imagine there is a great deal of documentation. Oddly, I never really hear about or see such documentation.

          • ShaneCRoach

            Not allowing the government to be at all involved in enforcing contracts that have to do with interest bearing debt means people sell rather than lend things they have in excess of their need. This has a fairly obvious impact on the general economy. Please stop trying to pretend I am talking about things that no one believes important.

          • Justin Merrill

            Shane,

            Your example here of the 100 person thought experiment suffers from the mercantilist fallacy. First it is not mathematically true that one individual would end up with all the money, and secondly, even if they did, they would purchase goods and services from others as consumption, or invest in/hire other people for production (because people do eat and they don't live in the Garden of Eden).

            Either way, marginal utility will recirculate the money as income which is far greater than debt servicing costs.

          • ShaneCRoach

            "Your example here of the 100 person thought experiment suffers from the mercantilist fallacy. First it is not mathematically true that one individual would end up with all the money, and secondly, even if they did, they would purchase goods and services from others as consumption, or invest in/hire other people for production (because people do eat and they don't live in the Garden of Eden).

            Either way, marginal utility will recirculate the money as income which is far greater than debt servicing costs."

            I never said one person would, nor indeed do I imagine it would not be spent by those cornering the market. What I said was that allowing interest bearing debt to be enforced by the government, specifically on a commodity or other asset required for taxes and debt payment, naturally creates a pooling of the resource, and indeed this is exactly what we repeatedly see.

            I am not aware of a single study, thought experiment, or other supposed scholarly argument that can dismiss the reality that this combination of issues can result in really anything else. I see a lot of people like you pretending it is somehow ludicrous to have such a concern, but no scholarship addresses this issue.

            Perhaps it is not necessary to address directly. If you would prefer to discuss how you would regulate a "free banking" system to prevent monopolistic control of the credit supply, I'm all ears. To sit there and argue that monopolies of money and credit markets are of no concern though is really just silly.

    • ShaneCRoach

      Move it where? From one bank vault to another?

      If your concern is that the money is not safe because we cannot trust the accounting of one bank, it is unsafe under the oversight of the other as well. People put real commodities in places of security because they trust them. The idea that the physical money needs to be -moved- to ensure its safety is specious. Either these organizations can be trusted to maintain reliable records of ownership and the physical security of the goods or they cannot.

      These are not the issues that make banking a problem.

    • http://vikingvista.blogspot.com vikingvista

      "The golden rule (no pun intended) should be that for every Dollar (or Pound or …..) of lending there must be one Dollar of REAL SAVINGS – and that money (the physical money) must be transferred from savers to borrowers."

      If the monetary base is "physical", then fractional reserve banking matches this description–then fractional reserve banks deal exclusively in the borrowing and lending of "physical money".

      Abe loans 100 gold coins to Bill, who loans it to Carrie, who loans it to Dan, who loans it to Eva, …, who loans it to Zed. *Only* physical gold coins are ever borrowed or loaned, and yet the broad money supply in this zero fractional reserve example is 26 times the monetary base of 100 gold coins. Whether or not such credit expansion constitutes a "boom" is entirely a matter of the economic conditions surrounding those loans. Debt is not itself inherently unstable, not even if people are willing to barter in IOUs.

      • ShaneCRoach

        Please….

        In the modern world, the money is lent out by the bank while being maintained as still available for withdrawal by the "lender". It cannot be both at the same time without being unstable.

        Usually the lender is not so much a lender at all as someone looking for a safe and convenient place to put the money they are required by law to have to pay bills and taxes. Few even realize the extent to which their checking accounts create revenue for the bank. Heck, until last decade, banks were required by law NOT to pay interest on checking accounts due to concerns about the instability that would create.

        • http://vikingvista.blogspot.com vikingvista

          "In the modern world, the money is lent out by the bank while being maintained as still available for withdrawal by the "lender". It cannot be both at the same time without being unstable."

          Not only CAN it be stable, but it almost always IS. The correct determinations of the fractional reserves, along with the correct prediction of bank loan repayment is what makes it stable. The intermittent instability you speak of has, historically, been failure of the latter. It has been due not to the mechanisms of fractional reserve lending, but rather to the making of too many bad loans. And that has likely been due to distorted market signals *not* related to fractional reserve lending, but rather to such things as imprudent expansion of the monetary base, or destabilizing regulations.

          But offering depositors very short time deposits or the option of loan acceleration, while maintaining reserves compatible with both that offering and surrounding economic circumstances, is not unstable.

          Or rather, it is no more unstable than any systemic network of prudent lending. Which is to say, it is no more unstable than the market-signaled expert predictions of future income streams. And industrialized societies depend upon such future predictions.

          "Usually the lender is not so much a lender at all as someone looking for a safe and convenient place to put the money they are required by law to have to pay bills and taxes."

          If he is a depositor, then he is ALWAYS a lender. He knows he is a lender, because he knows he receives interest payments for his loan. If he thinks loaning his savings to a commercial bank is safe and convenient, that is probably because his direct and indirect experience shows that it *is*.

          And the IRS and most businesses accept money orders. But to the extent people are legally compelled to use commercial banks, you are not criticizing fractional reserve banking, but rather government regulations.

          "Few even realize the extent to which their checking accounts create revenue for the bank."

          Few realize the extent to which their purchase of socks, or cars, or plumbing services generates revenues for those businesses. So?

          "Heck, until last decade, banks were required by law NOT to pay interest on checking accounts due to concerns about the instability that would create."

          Again you are criticising government coercion, not fractional reserve banking.

          • Justin Merrill

            Very well put, Vista.

          • ShaneCRoach

            In what sense is the pooling of resources into the hands of a very few people – something that has quite obviously happened and something that many well educated people who study this topic believe is exacerbated by partial reserve lending – "almost always" stable? Even you have to qualify it with the "almost".

            And then you parse out my rather direct and easily understood statement in order to make nonsense out of it, as if the huge corporations you say are to be trusted with this power were not at all involved in the regulation requiring them NOT to pay interest……..

            Anyway, yeah. The concern is monopolistic private control of a strategic asset very important to the economy. I've yet to see a convincing argument for the level of deregulation being suggested here, and indeed I think such deregulation is politically and perhaps even theoretically impossible. I do not see how you can "deregulate" something this important.

          • http://vikingvista.blogspot.com vikingvista

            "In what sense is the pooling of resources into the hands of a very few people – something that has quite obviously happened and something that many well educated people who study this topic believe is exacerbated by partial reserve lending – "almost always" stable? Even you have to qualify it with the "almost"."

            I'll not spend time in a diversion about wealth distribution, its effects, and its causes. Nor will I explain why your appeal to "well educated people" cannot be persuasive.

            Instead, I will merely ask you to look at the year-over-year stability of commercial banks over the last few hundred years and tell me if you can find any OTHER private debt or equity investment vehicles that have been empirically more predictably stable. Even without the recent central bank machinations, interest rates paid on commercial bank deposits tend to be lower than other investment vehicles, precisely because of their low risk nature.

            Instead of falsely calling them "unstable", you would be wise to refer specifically to intermittent panics or debt crises that have punctuated the commercial banks' remarkable stability. Then, you can attempt to explain how those panics were the result of the process of fractional reserve lending rather than something else.

            "And then you parse out my rather direct and easily understood statement in order to make nonsense out of it, as if the huge corporations you say are to be trusted with this power were not at all involved in the regulation requiring them NOT to pay interest"

            I reread my posts, and it would appear I said nothing about the involvement of corporations in government regulations. I am merely speaking about fractional reserve banking, which I am challenging you to rethink.

            But to entertain your diversion, yes many businessmen work in cahoots with regulators at the expense of their competitors and consumers. But that is not unique to banking. That is the very nature of a nation state. Somehow you think the solution is encourage those corporate cronies to design even MORE self-serving regulations? How is that wise?

            "I've yet to see a convincing argument for the level of deregulation being suggested here"

            But you made that argument yourself. You are the one who brought up the fact of regulatory capture.

            "I do not see how you can "deregulate" something this important."

            It is imaginable. Whether or not such imaginings are consistent with public choice theory is another matter. But even given the incentives of self-serving statesmen and their private cronies, strange things do occasionally happen.

            But back to the original point–fractional reserve banking is not what you think it is.

          • ShaneCRoach

            "I'll not spend time in a diversion about wealth distribution, its effects, and its causes. Nor will I explain why your appeal to "well educated people" cannot be persuasive."

            Banks are stable like the San Andreas fault – they aren't constantly in the process of earth shattering failure, but when they're not they're in the process of storing up the energy for the next disaster. And you don't want to talk about the nature of the pressure?

            If someone deposits money into a bank and the bank provides that it will be available on demand, then the bank (and by extension its shareholders) does not have any right to lend it. I wish people would take your advice and just yank their money from the banks in order to demonstrate to you (again) that there is nothing underlying all of this money that allows for the banks to repay what they have guaranteed to pay.

            Lying is wrong no matter how complicated you try to make the situation.

            "I reread my posts, and it would appear I said nothing about the involvement of corporations in government regulations. I am merely speaking about fractional reserve banking, which I am challenging you to rethink."

            I brought up the reality that the BANKS are the ones behind the self serving regulations. Your response seems to be that if there is no government regulation suddenly the banks will cease to be self serving despite the fact that you seem content to put the entire money supply of the nation into their hands.

            With or without regulations, the banks are not to be trusted. No one asking to be given control over money should be trusted. Deregulated partial reserve lending entrusts powerful private interests with this power without much in the way of accountability.

            It's not gonna happen.

            Heck, in Europe the move is on to return to a Greenback like total government takeover of the money supply. That's how far you are from having your finger on the pulse of what people are thinking about corporations right now.

            You should be talking about what sorts of regulations would serve the public and not the banks WITHOUT giving the government itself total power over the monetary system.

            There needs to be some sense of a balance of interests here.

          • http://vikingvista.blogspot.com vikingvista

            “Banks are stable like the San Andreas fault … And you don't want to talk about the nature of the pressure?”

            Hardly. What I have been trying to do, without success, is to get you to explain how you “know” that fractional reserve banking is the San Andreas fault, and not the city that sits atop it. If widespread simultaneous bankruptcies occur, they will be manifested most in concentrated centers of debt–i.e. in banks. But that no more means banks are the cause of the bankruptcies than San Francisco is the cause of earthquakes. And what I have been explaining to you, is that if you understand what fractional reserve banking is, there is no more rational reason to oppose it than to oppose the building of cities.

            “If someone deposits money into a bank and the bank provides that it will be available on demand, then the bank (and by extension its shareholders) does not have any right to lend it.”

            Your property is a pool that you own. If you have property rights, then you can do with your property whatever you like, consistent with whatever the rules are governing property in general.

            When someone loans you 100 gold coins, those gold coins are YOUR property, not the property of the person who loaned it to you (excluding some hybrid contractual arrangement). That’s what it means to loan. The person who loans it to you instead now owns your IOU. You traded your IOU in exchange for his 100 gold coins.

            In the case of banking, the individual money units that depositors loan to it do not have the depositors’s names etched into them. Depositors know they do not get those same units upon withdrawal. The money that depositors lend the bank becomes the property of the bank, and is indistinguishable from its other liquid assets.

            So, if the owners of a bank have property rights, then they have the right to loan their property, regardless of whether or not they are indebted to others. It makes no difference if the debt they own can contractually be called-in every 6 months, every 1 month, or every 1 hour. In accordance to their agreements, they are self-obliged to describe any prior acts truthfully, and to earnestly strive to promised future acts. As long as they do, no rights are violated.

            No debtor, not a bank, nor a credit card holder, nor someone who borrowed money for a car, is guaranteed to be able to repay his debts, because the future is not precisely knowable. The loans are made based upon both the lender’s and the borrower’s predictions about what economic circumstances will prevail (e.g. that a credit card holder won’t lose his job, or that too many of a bank’s loans will not fail). The business model of the bank (its reserves, interest rate profiles, loan selection process, ability of depositors to call-in their loans, etc.) is determined by predictions of future economic circumstances–just as all investments must be.

            In demand deposits, you are seeing a distinction that simply does not exist. That is why your criticisms ultimately apply to debt per se.

            “I wish people would take your advice and just yank their money from the banks in order to demonstrate to you (again) that there is nothing underlying all”

            You wish people would act against their own best interests? Why? Do you also wish all commercial lenders would simultaneously accelerate all of their business loans just to show that it is possible bankrupt businesses? Do you wish that all insurance policy holders would simultaneously crash their cars at high speed to show that there is “nothing underlying” the insurance industry? You don’t seem to realize that a loan is a trade. The lender (e.g. depositor) is getting paid *ONLY* if he maintains his deposit. If he doesn’t want to partake in the the bank’s income stream, and risk loss of that stream, then the bank usually offers more secure services that he can pay for.

            “Lying is wrong no matter how complicated you try to make the situation.”

            So, if you lose your job and can’t pay your debts, you are a liar? No. The inability, due to unexpected circumstances, to pay back a debt is not lying, it is default. Default is a risk of all debt. The banks don’t lie, they borrow, and their default rates are considerably lower than, e.g., credit card holders.

            “I brought up the reality that the BANKS are the ones behind the self serving regulations. Your response seems to be that if there is no government regulation suddenly the banks will cease to be self serving “

            Being self-serving without the support of the regulatory state is quite a different matter from being self-serving with it. Why do you insist on giving banks ever more government powers?

            “Deregulated partial reserve lending entrusts powerful private interests with this power without much in the way of accountability.”

            Just the opposite–it restores the accountability that state regulations removed.

            “That's how far you are from having your finger on the pulse of what people are thinking”

            I know exactly what people are thinking. I just happen to also know that they are wrong.

            “You should be talking about what sorts of regulations”

            There are no regulations more demanding, more brutal, and less forgiving than natural market regulations. That is why the most powerful banks capture state regulations–to protect themselves from the voluntary market. You have an anti-bank tone while simultaneously advocating greater coercive powers for the biggest banks. I have my finger on your pulse, and it feels like the arrhythmia of cognitive dissonance.

            I put together a short economic quiz that I sincerely hope you will find more enlightening than offending:

            http://j.mp/16LOoEp

          • ShaneCRoach

            I thought your test was cute.

            I also think this is not far from being correct – "You have an anti-bank tone while simultaneously advocating greater coercive powers for the biggest banks. I have my finger on your pulse, and it feels like the arrhythmia of cognitive dissonance."

            Fact is, I trust neither, and am not very comfortable with any solutions I have heard from anyone so far. I keep fishing for a free market solution that would remove banks from the equation and replace them with credit offered by brokerages designed more like the stock exchange or the commodities exchange. "Money" at this point would be credit offered in exchange for goods and services by these brokerages or by individual brokers. The government need only be engaged then when the brokers fail to honor their offers of credit for whatever goods or services they accept, and everyone would be very openly aware that any given broker or brokerage is to be judged based on their history of reliability.

            Whether you choose to acknowledge it or not, people in general are not aware of the tenuous nature of their deposits at banks. They think of banks as safe places for their assets, and not as loans to huge and untrustworthy institutions. If they were not burdened with this misunderstanding, they would not deposit their money there to begin with and we would have a very different economic landscape indeed.

            In short, your admission that banks themselves are making promises they cannot keep is pretty much all I was ever looking for. I just don't imagine I know why you think deregulating them is going to make them suddenly more likely to be reliable. I followed up on a post some time ago concerning Dr. White's ideas about Scottish Free Banking (a refutation indeed by Rothbard)and, despite your characterization of him, his response to the assertions Free Bankers make seem to be backed by a lot of historical understanding rather than an inability to distinguish a bank from a warehouse.

          • http://vikingvista.blogspot.com vikingvista

            "your admission that banks themselves are making promises they cannot keep"

            Not only is that pretty much the *opposite* of what I wrote, it is demonstrably false. Banks not only *can* keep their promises, they not only almost always *do* keep their promises, their default rates are less than almost any other debtor.

            How you go from "the future is uncertain" to "banks can't keep their promises" probably employs the same strain of logic that leads you to conclude that the solution to regulatory capture is more regulation.

          • http://ralphanomics.blogspot.com/ RalphMusgrave

            Vikingvista,

            You suggest that it’s the making of silly loans that wrecks fractional reserve banks, not fractional reserve as such.

            The flaw in that argument is that under full reserve, it just ain’t possible for banks as such to suddenly fail because depositors carry the costs of silly loans (at least that’s certainly the case with Laurence Kotlikoff’s version of full reserve). See:

            http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html

          • http://vikingvista.blogspot.com vikingvista

            "You suggest that it’s the making of silly loans that wrecks fractional reserve banks, not fractional reserve as such."

            No, I overtly say that it is unexpected widespread coordinated bankruptcies that drive fracres banks toward insolvency. There is nothing "silly" about the parties to the failed loans. These are serious, self-interested, smart, experienced people, typically with an uncommon track record of financial success.

            In a large complex economy, no amount of humanly-attainable economic knowledge removes dependence upon price signals. When the price signals are sufficiently manipulated to direct and maintain unsustainable investments, that is what will happen until it can happen no more. And I have yet to see a persuasive argument that private lending intermediation (i.e. fracres banking) distorts rather than follows those signals.

            "The flaw in that argument is that under full reserve, it just ain’t possible for banks as such to suddenly fail because depositors carry the costs of silly loans (at least that’s certainly the case with Laurence Kotlikoff’s version of full reserve)."

            Like all anti-fracres complainers, even the very few who know what fractional reserve banking it, you are ultimately a debtophobe. Ultimately all that you are saying is that less debt means less chance of default. That's it. You are (uninterestingly) right. If you forcefully hamper the efficiency of debt investing, debt investing will be less able to respond to false signals. But it is also true that you get less chance of default if you have less use of money, less overall investment, and less trade. You also get less chance of hospital acquired pneumonia if you have less hospitals, less chance of highway accidents if you have less highways, and less chance of human death if you have less births. And you have less chance of nasal cancer if you cut off your nose even to spite your face.

            You seem to forget that default is not the only way people lose money. Next your ilk will be demanding the governments shut down stock markets because of all the money that allegedly defrauded naive equity investors can loose in a financial panic. Your ilk appear to have no interest in actually understanding the causes of financial panics, only punishing their victims and attacking economic efficiencies that are necessary for the sustained economic growth the modern world has become used to.

            If there is nothing wrong with one person lending his personal gold coins to another person, then there cannot be anything wrong with the more conservative (because of risk reduction through pooling and use of reserves) practice of fractional reserve banking. The latter only scales up the former by making it more efficient and LESS risky.

            What you should instead be focusing on are the phenomena that cause a great many loans to simultaneously appear better than they are to a great many independent expert investors.

  • http://ralphanomics.blogspot.com/ RalphMusgrave

    To describe Corrigan’s writing as “long and meandering” is the understatement of the year. He regularly uses a thousand words when one will do.

  • http://vikingvista.blogspot.com vikingvista

    Re: your addendum

    Although I wouldn't judge the entirety of either Rothbard's or Mises's works on this one topic, it does seem to me that the very worst of the money-from-nothing rothbardians are the intellectual descendents of both Rothbard *and* Mises…

    "Let’s see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I “lend out” $10,000 to someone"

    –Rothbard, http://j.mp/16LASR6

    "Circulation credit is credit granted out of funds especially created for this purpose by the banks. In order to grant a loan, the bank prints banknotes or credits the debtor on a deposit account. It is creation of credit out of nothing. It is tantamount to the creation of fiat money, to undisguised, manifest inflation."

    –Mises, http://j.mp/10GmfKe

    • George Selgin

      Thanks for pointing this out. Of course there are things I disagree with even in the works of the greatest Austrians (the passage from Mises, for instance, is one I took issue with in The Theory of Free Banking). But there's a vast difference between these writers, who were serious economists and who put in the hard effort required to become such, and others who, having read some Rothbard (who was a real economist) and Hoppe (who isn't), imagine that being sufficiently "hard core" when it comes to making pronouncements about economic matters is all it takes to be a good economist.

    • ShaneCRoach

      It's as if you did not read the article you are citing. Rothbard here is pointing out that in some instances banks floated more notes than they had. This manifestly happened, and to the exact end that he specifies – that the ones who were the sloppiest at it were forced out of business.

      Mises likewise is saying nothing untoward in the quotation you have from him. I'm not even really sure what your complaint is about that citation.

      The common thread to every quotation I hear you all trying to somehow debunk is the openly dishonest manner that banks have operated. No, people do NOT understand banking. They don't understand it precisely because banks do not advertise what they ACTUALLY do. They advertise to be perfectly safe institutions, and of course now the government underwrites that in the USA (and I presume across the Western World to a great extent) through deposit insurance.

      This simply IS the state of things, and since people do not understand it they do not save in any real, objective sense. They do not realize what is going on. All of their savings are in various paper assets. When one part of the paper economy goes bad, everything else goes into a tailspin. People who have properly diversified portfolios that include real estate, gold, etc, can survive and thrive if they shift their assets in a timely manner. Others, utterly misunderstanding the system, are bilked out of their life savings at times by the owners of these institutions who then begin to wag their heads at the unfortunate miserable ignorance of the masses….

      It's not "ignorance" if you've been lying to them all the while.

      • http://vikingvista.blogspot.com vikingvista

        No. He is incorrectly describing what private fractional reserve banking is.

        • ShaneCRoach

          "But, I, of course, can’t pay the $10,000, so I’m finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply."

          Read more: http://www.fee.org/the_freeman/detail/fractional-reserve-banking-part-ii#ixzz2bo1oFRVt

          This is roughly what you guys here mean when you say that in a free banking system the banks are held accountable by market forces, is it not?

          Look, I'll do you all a favor and just unsubscribe from this place. I am not finding out anything useful here. Your responses are nonsense.

          • http://vikingvista.blogspot.com vikingvista

            "This is roughly what you guys here mean when you say that in a free banking system the banks are held accountable by market forces, is it not?"

            I'll give you this much–market forces do strongly tend to keep fractional reserve banks behaving AS fractional reserve banks rather than as the "bank" which Rothbard incorrectly calls "fractional reserve".

      • George Selgin

        Actually (since you insist on my elaborating), the passage from Rothbard above displays extreme ignorance of fundamental banking theory, which would earn an "F" from any student in my undergrad money and banking class. No commercial bank could do what he imagines a "typical" bank doing. None. Ever. The example is sheer fantasy. That you find it unobjectionable only proves that Rothbard isn't the only person capable of getting such things wrong. Only you have the advantage over Rothbard of not pretending, so far as I'm aware, to be an expert monetary economist.

        As for the passage from Mises, my critique refers to the longer discussion of "circulation credit" from which it is drawn.

        • VangelV

          But isn't that what the banks did? How exactly was it that they needed a huge bailout if they did not use a massive amount of leverage? Where did they get the money from to purchase all those toxic assets?

          • George Selgin

            No sir. First of all, the greatest recipients of bailout money were not commercial but investment banks, which did not offer demand deposits. Second, it was the poor quality of their investments, and not an ability to invest some multiple of the funds they acquired, that got them into hot water. So to blame the recent boom on fractional reserve banking is to misdiagnose it very badly.

          • VangelV

            "No sir. First of all, the greatest recipients of bailout money were not commercial but investment banks, which did not offer demand deposits. Second, it was the poor quality of their investments, and not an ability to invest some multiple of the funds they acquired, that got them into hot water. So to blame the recent boom on fractional reserve banking is to misdiagnose it very badly."

            Is this true of Iceland, Spain, Greece, and Cyprus as well? It is all the fault of the big bad investment banks and the commercial banks had nothing to do with it? If that is the case why did the Cyprus government rape the bank depositors? And let us not forget that it was not bad loans to risky borrowers that are creating the latest problem for the banking system. It is the holding of sovereign debt that is issued by governments can can never pay back the lenders without inflating the currency that is the real problem and real issue. This is something that the Austrian economists were talking about a number of years ago when the mainstream was laughing and saying that everything was going great.

  • Paul Marks

    The defenders of FRB tend to have a problem keeping a grip on basic morality (actually all human beings have a problem keeping a grip on basic morality – but most of us do have a sense of shame, we may do wrong but at least we know we are doing wrong) – even relatively conservative defenders of FRB such as Benjamin Anderson of "Economics and the Public Welfare".

    Unlike Milton Friedman, Benjamin Anderson accepted that the 1920s "Bank of the United States" was a fraud – that the people in charge were crooks not just guilty of "technical breaches of the law" (as Milton Friedman put it), that the whole bank was a corrupt farce. To Anderson a banker could break the normal rules of language and conduct (more on that latter) – but NOT without limits, that gains (gains beyond ordinary money lending) should be made, but only to a certain extent (the long con, not just a short con – so that there is stuff to hand on to one's children and grandchildren)….. NOT just "we will grab everything we can even if the world collapses" (the attitude of so many modern bankers, although mislead by "education" they may not even understand the consequences of what they do).

    However, Anderson takes it a matter of course that bankers should be allowed to break contracts (for example by "suspending cash payments") and that the government (and its courts) should back them when they do break their contracts (and do other such stuff). Anderson then goes on to mock people (such Senator Carter Glass) who believed in hard rules of moral conduct ("written in fire in the sky" – as Anderson puts it in a "polite" [i.e. cowardly] sneer) – not just on banking, but on EVERYTHING.

    To people like the late Benjamin Anderson morality was whatever benefitted the "evolution of society" – in a dangerous situation they could lie, cheat, sell people out…… and still feel good about themselves, because of their view of what morality was (the-moral-thing-to-do-is-what-benefits-the-evolution-of-society-and-me-getting-out-of-this-benefits-the-evolution-of-society).

    This is not to say that the late Mr Anderson was not a "gentleman" – of course he was, he spoke nicely, had good dress sense, knew all the subtle rules of social behaviour (such as attacking someone without openly insulting them – destroying them without doing anything open that they could call him to step-outside-and-fight about). It was just when things were very difficult – the rules of basic moral conduct did not apply (i.e. at the very time when a "Redneck" thinks those rules are most important – even at the expense of their own lives).

    Understanding this state of mind is of far more importance in understanding what lies at the root of FRB, than understanding this-or-that technical point.

    Should a money lender actually have the money they claim to be lending out?

    Of course they should – the PHYSICAL money.

    Does a money lender still have the money AFTER they have lent it out?

    Of course they do not. They do not have the money till when (and IF) it is paid back.

    These are basic moral matters (just as 1+1=2 is a moral matter – not just a matter of mathematics, and A is A is a moral matter – not just a matter of the rules of logic, the law of identity) – not technical questions to be obscured by a web of words and numbers.

    A person who obscures these matters will not just confine such a "flexible" view of conduct to banking – they will be "flexible" in their words and conduct in other aspects of their life also.

    • http://vikingvista.blogspot.com vikingvista

      "Should a money lender actually have the money they claim to be lending out? Of course they should – the PHYSICAL money."

      I don't know if a lender should, but with fractional reserve banking (upon a "physical" monetary base), a lender does. So your question is moot.

      "Does a money lender still have the money AFTER they have lent it out?"

      No. At least with fractional reserve banking they do not.

      Are you not aware that the classic money multiplier of fractional reserve banking is explained entirely and exclusively by the lending and borrowing of basic money (physical money if the base is physical)?

      But there is a moral issue at play. Opponents of fractional reserve banking inevitably either:

      (1) demand state violence be used against individuals for the voluntary centuries-old act of lending their property and/or borrowing the property of others; or

      (2) falsely accuse such individuals of an offense (such as fraud) which most people believe justifies violent retribution.

      Conventional statists usually commit (1), while some self-described "libertarians" commit offense (2). Although the intellectual confusion of fractional reserve banking opponents is hard to fathom, their immorality is hard to stomach.

  • Paul Marks

    Irving Fisher (of Yale I believe) was astonished by the bust of 1921 – and he was astonished AGAIN by the bust of 1929 (he had learned nothing).

    He continued to be obsessed by the "price level" – misunderstanding "inflation" as an increase in this "price level" rather than the money supply. All of Frank Fetter's efforts to explain the matter to Irving Fisher fell upon deaf ears.

    As for the idea that the government printing press would be better than banker credit bubbles (FRB).

    Not so – it would still be lending that is not from REAL SAVINGS, and would still mean malinvestment (the distortion of the basic capital structure).

    There is even an "empirical experiment" for those who do not accept a priori logic.

    General Peron (of Argentina) actually tried the idea (supported by some people based in Chicago – as well as Fisher of Yale) of banning banker credit bubbles BUT putting the government printing press in their place.

    The results were not good – to put the matter mildly.

    Replacing banker credit bubbles with Peronism (i.e. the government printing press) is jumping from the frying pan to the fire.

    Forget the general "price level" (in a free market where wages and relative prices are allowed to adjust freely, moderate "deflation" DOES NOT MATTER – indeed it is actually a sign of economic PROGRESS as it means goods and services are more affordable).

    Of course the modern Western World has little in common with the above – because the modern Western World is a credit bubble absurdity, where both the monetary and financial order and the "real economy" is so distorted (so twisted) that it is hard to find words to describe it.

    For example, it is actually a mistake to talk about the "financial markets" as these things are no so twisted (so perverted by interventionism) that they are not really markets at all.

  • http://ralphanomics.blogspot.com/ RalphMusgrave

    Prof Selgin,

    I suggest there are two weaknesses in your original argument above. First, you correctly argue than an INDIVIDUAL bank cannot make silly or inflation causing loans, else it loses reserves to, or becomes hopelessly indebted to other banks.

    But what if ALL COMMERCIAL BANKS are in “irrational exuberance” mode? In that case no one bank becomes particularly indebted to another when making silly loans. And wasn’t that exactly what we saw before the crunch? Certainly in the UK in the three years prior to the crunch, the rate of expansion of commercial bank created money shot ahead of the equivalent rate for Bank of England money.

    Second, you admit in an article in Capitalism Magazine (like below) that if fractional reserve banking is introduced to an economy where the only form of money is gold, then there will be an initial inflationary effect.

    http://capitalismmagazine.com/2012/06/is-fractional-reserve-banking-inflationary/

  • Paul Marks

    Vikingvista.

    Under FRB most of what bankers (and other such) call "money" is not money – it is credit bubble (so called "broad money").

    Commodity money (gold, silver – or whatever commodity people choose to value) gets its store-of-value (i.e. money) function by people choosing to value the commodity. Fiat money (government token notes and coins) gets its "value" from government legal tender laws and tax demands.

    But the banker "broad money" (the credit bubble) is doomed from the very moment of its creation (whatever book keeping tricks are used to create it) – unless backed by the government printing press, then this "broad money" (this credit bubble) will inevitably burst (the only question is the timing). And the "broad money" (the credit bubble) will shrink back down towards the "monetary base" (the actual money). It is NOT that "the deflation destroyed the money" because this "money" NEVER EXISTED IN THE FIRST PLACE (it was a credit bubble).

    Now you can read…..

    You know perfectly well that I said PHYSICAL money – yet you said that bankers (under FSB) have the money they lend, that there-is-nothing-to-see-here-people-move-along, just bankers putting real savings to work.

    I repeat – you can read, and you are NOT dumb.

    What you have done is illustrate the "moral problem" I point out above.

    • George Selgin

      (1) Legal tender laws aren't responsible for the positive valuation of fiat money, though they can play a role in influencing that value. (2) There are no grounds for assuming that the sustainable amount of bank credit, even restricting this to mean credit based on demand deposits, is zero. (3) The rest of your argument is just the usual Rothbardian nonsense. Broad money claims against narrow money are not "titles" to such or bailment contracts or whatever it is that might be taken to imply that there ought to be a 1-to-1 correspondence between them and narrow money held by their creators. You may shout the contrary from the mountaintop for all your worth, and get the whole Rothbardian chorus to chime along with you, but you can never succeed in giving so much as a grain of truth to your opinion. This isn't a matter of morality. It's a simply matter of being able to read a bank deposit contract or the legends on any traditional banknote.

    • http://vikingvista.blogspot.com vikingvista

      Paul,

      "Under FRB most of what bankers (and other such) call "money" is not money – it is credit bubble (so called "broad money")."

      You have a problem with others defining certain types of credit as a type of "money", and yet you unabashedly define all bank credit as a "bubble". No, Paul, bank credit is not always a "bubble" and people who talk about credit money or broad money typically know how it differs from basic money. The label is far less important than understanding the concept.

      "Commodity money … gets its store-of-value (i.e. money) function by people choosing to value the commodity. Fiat money … gets its "value" from government legal tender laws and tax demands."

      So you think THE money function is as a store of value? Have you ever heard the phrase "medium of exchange"? Do you think suspension of redemption for an established money immediately suspends its use as a medium of exchange? You think that people do not value a medium of exchange solely for its function as a medium of exchange, in spite of the undeniable economic benefits they derive from it?

      "But the banker "broad money" (the credit bubble) is doomed from the very moment of its creation"

      That is only true if credit per se is always doomed from the very moment of its creation. Is that what you believe? All credit is doomed?

      ""broad money" (this credit bubble) will inevitably burst"

      Is that a faith-based belief, or can you give an economic theory demonstrating this logically necessary effect?

      "It is NOT that "the deflation destroyed the money""

      Right. Instead it is that *default* destroyed the debt–a usually less desirable but far less common way to destroy debt than to pay it back. Deflation is an effect, not a cause.

      "because this "money" NEVER EXISTED IN THE FIRST PLACE""

      You don't think bank credit ever existed? Or is that you don't think people ever traded in bank credit? Either belief seems to fly in the face of experience.

      "You know perfectly well that I said PHYSICAL money"

      I'll bet that is why I repeated the word "physical" no less than three times in my reply. Perhaps you should reread my reply under the assumption that I meant what I said.

      "- yet you said that bankers (under FSB) have the money they lend,"

      Correct. Under a physical monetary base, commercial bankers only loan the physical money that they own. If the monetary base is gold coins, then banks exclusively loan their own gold coins. Shall I repeat this a third time?

      "that there-is-nothing-to-see-here-people-move-along, just bankers putting real savings to work."

      Now you are starting to catch on.

      "I repeat – you can read, and you are NOT dumb."

      Thanks for the complement. I'm glad the jury is in on one of us.

      "What you have done is illustrate the "moral problem" I point out above."

      The only "moral problem" that means anything to me is how one person acts against another. When someone insists on using violence of legislation or incites violence by calumny in order to prevent other people from voluntarily lending or borrowing, it is pretty clear who has the moral problem.

  • Paul Marks

    Without tax demands and legal tender laws (two factors – not one), it is very unlikely that fiat money would have any value – indeed (strictly speaking) "fiat" money could not even exist without tax demands and legal tender laws, as "fiat" means "command" "order"(as in "by fiat") – it is not just the government printing nice bit of paper (or getting banks to do so – such as those, rather attractive, fiat notes that the Bank of Ireland produces – now there is a weird thing, British Pounds, printed by a bank based in Dublin in the Republic, and used in Ulster….), there has to be iron fist in the velvet glove.

    Otherwise we are back to commodity money (not "gold standards" or "silver standards" or any such "standards" – but rather the commodity itself).

    Of course I would not exactly burst into tears over that.

    • George Selgin

      Paul, your view overlooks the role of network effects in getting and keeping fiat monies afloat even when they cease to be supported by the other devices you name. It happens I have a 1994 article on the very topic.

  • Paul Marks

    George – the Somalia example may offer partial support for your position.

    In some areas of Somalia (it is a complex place – in some areas there is a formal government system in other areas no so) there are no (functioning) legal tender laws, and no (functioning) systems of taxation (there are certainly governments-bandits – but they tend to take goods rather than have a formal taxation system) – yet some token notes still circulate as money.

    Although they tend to be of very uncertain value.

    Carl Menger told the story of how all money started as one commodity or another – but may become utterly divorced from that commodity over time, and yet still used (out of HABIT).

    When Saddam Hussain fell in Iraq his legal tender laws and taxation system fell with him

    Yet some people sill used old Iraqi dinars.

    The value fell away over time – as habits faded.

  • http://ralphanomics.blogspot.com/ RalphMusgrave

    Reply to Vickingvista, August 15th, 2013 3:55 pm.

    “I have yet to see a persuasive argument that private lending intermediation (i.e. fracres banking) distorts rather than follows those signals.”

    First “private lending intermediation” is not the same as fracres banking: full reserve banking also involves private lending intermediation.

    Second, the distortion that fracres banking involves derives from the fact that real world fracres banking involves taxpayer backing for depositors. I.e. what advocates of full reserve like me want is an abolition of all taxpayer backing or subsidies for banks. But that runs into the political reality that the population demands somewhere 100% safe to deposit it’s money, which is a reasonable demand.

    Our response is to set up 100% safe accounts (perhaps government run) where no interest is paid because nothing is done with the money. Alternatively, depositors can have their bank lend on their money, but depositors carry the full risk (let’s call those “investment accounts”). (And contrary to your claim that I’m a “debtophobe”, I’m quite happy to see the total amount of debt quadrupled, just as long as lenders carry the full risk, not taxpayers.)

    However, there’s only one form of 100% safe money: a claim on government (i.e. monetary base). A claim on a commercial bank is not so safe. And that in turn leads irrevocably to full reserve banking. To illustrate, if a commercial bank lends money into existence, and half is subsequently put in safe accounts and half in investment accounts, the stuff in investment accounts is not really money since it can fluctuate in value depending on the performance of the underlying loans. The relevant holding is more in the nature of a mutual fund holding. Indeed, Kotlikoff explicitly argues that those stakes should take the form of mutual fund holdings.

    As to the stuff in safe accounts, that’s genuine money, but for reasons given above, it has to be monetary base. Ergo under that system, the only entity creating money is government. And that equals full reserve banking. There is more on this idea here:

    http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html

    • http://vikingvista.blogspot.com vikingvista

      Ralph,

      Thanks for the reply.

      It is *not* a reasonable demand for anyone to insist his loans be 100% secure, any more than it is reasonable to demand the laws of physics be suspended, or that crystal balls be a reality. The relatively recent imposition of government ostensibly-backed depositor insurance does indeed lead to bank and depositor behavior that causes dangerous economic distortions, but such an imposition is neither characteristic of fractional reserve banking in its centuries-old history, nor an inevitable feature of it.

      Your solution cannot work for several reasons:

      First, if you choose to have the government create "100% safe accounts", you have merely transferred the government-induced moral hazard from depositor insurance to these new accounts. The history of government management of gold standards and all manner of "guaranteed insurance" programs (FDIC, SS, MC, etc.), and the recognition of the incentives that necessarily prevail in a state institution are sufficient to conclude this. The moral hazard is worsened if you force taxpayers rather than individual account holders to pay for the cost of this program.

      Second, your investment accounts are nothing more than the usual interest-bearing bank accounts (although perhaps with the dubious and arbitrary imposition of some minimum redemption interval) for which markets have declared an overwhelming preference long before the advent of government depositor insurance. So there is every reason to believe markets would simply abandon your "safe" accounts. The reason is obvious–in spite of punctuated panics, bank accounts have an exceedingly good track record of safety AND they pay interest.

      Third, you've not solved any problem. It isn't debt that distorts signals. Rather, people engage in debt transactions in response to distorted signals. That is, the signals tell people where their economic endeavors should be directed and in what magnitude, and in response people use investments of all types–debt and equity–to attempt to achieve ends that they can't know are unachievable. If the government went so far as to ban debt vehicles, people would channel those resources more into equity vehicles and their balance sheets would fair just as poorly in recessions (although probably from a substantially lower economic standard). Panics affect equity markets as well as debt markets.

      If you want to solve the problem of dislocations from bubbles, you need to solve the problem of dramatically distorted economic signals. You can only solve that problem, by getting state agencies to substantially decrease their distorting interventions, not by imposing new interventions of your design.

      And the problem of government depositor insurance is a politically difficult one to overcome. But that issue is not at all unique to depositor insurance. It is true of a great many and growing number of distorting promises and benefits that state agencies make which voters are reluctant to give up despite economic realities.

      Finally, the "debtophobe" accusation is not meant to be a condition realized by the debtophobe. It is instead a conclusion of what it really means to oppose fractional reserve banking. Fracres banking is a conservative form of common debt transactions. If a person opposes a conservative forms of debt, he surely opposes riskier forms.

  • Paul Marks

    Vikingvista "SHOW ME THE MONEY" (as the old line goes).

    Not figures on a computer screen – or ink in a ledger book.

    The actual (physical) money.

    You can not do this.

    Because it does not exist.

    • http://vikingvista.blogspot.com vikingvista

      Paul,

      Is it by that same direct visualization standard that you've chosen to believe banks violate this rule?

      Using impossible double standards to shield an indefensible fantasy is commonly how a sane person chooses to protect his religious faith (or an insane person his delusions) from the intrusion of reason.

      So your fixed false impervious belief that actual fractional reserve banks do not function according to the definition of fractional reserve banks is as safe from me as it is from all other aspects of reality.

      Enjoy the comfort it brings you,

      vikingvista

  • Paul Marks

    Vikingvista are you claiming not to know that "broad money" (bank credit) is larger than the "monetary base" (the actual money)?

    People talk as if "fractional reserve banking" meant a "fraction" of nine tenths (or some-such), actually it more often means something closer to ninety tenths.

    It is NOT "I have 100 Dollars – I will lend out 90 Dollars and keep ten Dollars in reserve", it is more like "I have 100 Dollars – I will lend out 900 Dollars).

    Although, of course, via a vastly complex process – involving many banks (not just one).

    But the basic fact remains – they can not show the money, because IT DOES NOT EXIST.

    Their "broad money" is not real money – it is a credit bubble.

    The "deflation" of the "bust" does not "reduce the money supply" because this money NEVER EXISTED IN THE FIRST PLACE (it was a credit bubble).

    • George Selgin

      "It is NOT "I have 100 Dollars – I will lend out 90 Dollars and keep ten Dollars in reserve", it is more like "I have 100 Dollars – I will lend out 900 Dollars).

      Although, of course, via a vastly complex process – involving many banks (not just one)."

      For given fractional reserve ratios, this is true only if $100 of net fresh reserves enter the system, not otherwise. In the present, fiat system it occurs only if the central bank itself engages in credit expansion, a fact that merely affirms my post's original conclusion.

    • http://vikingvista.blogspot.com vikingvista

      "Vikingvista are you claiming not to know that "broad money" (bank credit) is larger than the "monetary base" (the actual money)?"

      Nope. Instead I meant exactly and literally what I wrote. Absent central bank intervention:

      1. the broad money supply is larger than the monetary base, AND
      2. reserve fractions are always less than 1, AND
      3. banks only loan the *basic* money they own and nothing else.

      "People talk as if "fractional reserve banking" meant a "fraction" of nine tenths (or some-such),"

      Only people who know what fractional reserve banking is (though usually a lot less than 9/10, it is always less than 1, absent central bank interventions).

      "actually it more often means something closer to ninety tenths."

      Never true (absent central bank intervention).

      "It is NOT "I have 100 Dollars – I will lend out 90 Dollars and keep ten Dollars in reserve","

      That's exactly what it is.

      "it is more like "I have 100 Dollars – I will lend out 900 Dollars)."

      Never (absent central bank intervention). But this rather embarrassing error is easily remedied by anyone with a 6th grade understanding of arithmetic, and the desire to employ that understanding.

      "Although, of course, via a vastly complex process – involving many banks (not just one)."

      It isn't really that complicated. Any average encyclopedia, even wikipedia, will step you through the money multiplier. Or, you might check out my tediously precise layman's description written specifically for the deprogramming of rothbardians:

      http://j.mp/1bF4QaU

      "But the basic fact remains – they can not show the money, because IT DOES NOT EXIST."

      The basic fact remains that the basic money does exist, they own it, and they could show it with every single loan they make, if they were so disposed to such unnecessary spectacles.

      "Their "broad money" is not real money – it is a credit bubble."

      The bank's broad money is their borrowing of basic money. It is as real as any loan anyone ever made (though only certain loans to banks are counted as broad money, since only certain loans to banks are widely used in exchange for goods and services). It need not be a bubble any more than your loaning cab fare to a friend need be a bubble.

      "The "deflation" of the "bust" does not "reduce the money supply" because this money NEVER EXISTED IN THE FIRST PLACE (it was a credit bubble)."

      The deflation of the bust is the defaults that end the debts that make up much of the broad money supply. If you don't think debt exists, then start a policy of never paying back money you own to friends or family, try walking away from your mortgage or credit card bills, try signing over your traveler's checks to the homeless, or burning your cashier's checks, or disavow all your checking accounts, and then report back to me what happens to your material well-being.

  • Paul Marks

    Vikingvista.

    The "broad money" IS THE BANK CREDIT – IT IS THE LOANS.

    To say that the banks only lend "the monetary base" (the actual money) is simply not true.

    Even in the 19th century it was untrue – although the gap between the monetary base and the bank credit (the so called "broad money") was vastly less extreme than it is now.

    In the 19th century (Panic of 1819, 1857 and so on) banks would expand credit (create an artificial "boom" by lending out money that DID NOT REALLY EXIST) then the "bust" would come and "broad money" would shrink back down towards the "monetary base" (the actual money).

    What changed with the Federal Reserve (especially under modern managers such as Alan Greenspan) is the Fed refuses to allow the "bust" to take place (the major banks to go "bankrupt" people lose "deposits") – fearing a "deflationary crash".

    This is no a free market – and it is nothing to do with "Free Banking" (what this site is supposed to be about).

    Under "Free Banking" banks (no matter how large) must be allowed to go bankrupt (which means a "loss of deposits" – no government backed "deposit insurance").

    If there is a very large "broad money" bubble – then there must be a massive so called "deflationary crash", unless government steps in with its printing press.

    But government expanding the "monetary base" (to save the FRB banks) is not "free banking".

    If bankers choose to treat credit as if it was "money" ("broad money") then there are consequences of that – a "boom" (with expanding "broad money" – bank credit) and then a "crash" (as the "broad money" bubble shrinks back down towards the monetary base).

    If you do not like the "crash" then do not have the phony "boom".

    • VangelV

      "This is no a free market – and it is nothing to do with "Free Banking" (what this site is supposed to be about)."

      That is something that Dr. Selgin seems to have forgotten. In his attempt to attack Murray Rothbard at every opportunity he seems to have taken a wrong turn somewhere.

      • George Selgin

        Balderdash. The truth is precisely the opposite: that in their zeal to condemn FRB, the Rothbardians conflate the damage done by central banks and bad financial regulations with the dangers truly inherent to fractional reserve banking. No one who reads my post above, or others I've written on the topic, with the slightest care, can have failed to see that my writings supply no defense whatsoever of the status quo.

    • http://vikingvista.blogspot.com vikingvista

      Paul,

      It would have been useful if you had started your response with something like "I did not read your post, but I'm going to respond to it anyway with an older context of my own liking". I wrote "absent central bank intervention" no less than 4 times. How could I have made it clearer that I was talking exclusively about a free market regime? You are also unaware that I've already responded to the points you are simply repeating in your reply.

      Rather than repeating my responses, let me keep this simple in the hope that this time you will read it:

      1. Do you agree that a satisfactory definition of the term "fractional reserve banking" is "practice in which only a fraction of a bank's demand deposits are kept in reserve and available for immediate withdrawal (as cash and other highly liquid assets), whilst the remaining cash is lent out to borrowers (and so is never actually available for immediate withdrawal to legitimate deposit-holders"?

      2. Do you agree the "fractional reserve" is defined as "the magnitude of reserves divided by the magnitude of deposits"?

      3. Do you agree that the basic mechanism of the standard textbook "money multiplier" quantifier can be explained exclusively by describing physical hand-to-hand lending and borrowing of gold specie and only gold specie?

      Please attempt to move this discussion forward by responding in context and not simply repeating old slogans.

  • Paul Marks

    Vikingvista – I am talking about the topic (fractional reserve banking).

    If you choose to talk about other matters (because you dare not face the truth that FRB is based upon on a semi empty vault – where even the government token notes and coins do not match, do not come anywhere near matching, the amount of "money" the FRB claims to have) that is up to you.

    It does not "moving the discussion forward" – it is a refusal to face the truth. The truth that the banks do not have the money they pretend (perhaps even pretend to THEMSELVES) to have – that their "broad money" is a CREDIT BUBBLE.

    However, if you really want to talk about other matters (apart from the hollow sham that is FRB) I will give you a new topic.

    The gold market is also a sham – no more straight that FRB.

    The people who have been "selling gold" (supposedly private companies – but, really, backed by Central Banks) do not have the gold they have been selling (and neither do the Central Banks they are really acting for).

    It is a sham (a fraud) – the have sold gold that they do not have (indeed that DOES NOT EXIST) Central Banks have privately backed them – but they have pledged the same physical gold to multiple different parties.

    The stock market is a credit bubble farce.

    The bond market is a joke (without the Federal Reserve it would already have collapsed).

    The gold (and silver?) market is a fraud.

    FRB is not alone.

    It is the entire "financial system" that is a mess.

    To "repeat an old slogan".

    The end will be terrible – but at least it will be the end.

    This financial system is coming to an end – and the end will be terrible (I do not expect to survive it), but I welcome its end.

    By the way…..

    I have no objection what-so-ever to banks lending out 90% (or 100%) of the money that real savers entrust to them.

    As long as the money given by savers to bankers is not called "deposits" (because the money is NOT deposited – it is lent out) and the savers understand that when they give the money to bankers they DO NOT HAVE THE MONEY ANY MORE. And do not have it till when (and IF) the loans are repaid.

    My objection (a logical and moral objection – I am not talking about statutes and court judgements) is to banks lending out MORE than 100% of the physical money given to them – either as single banks or as the (book keeping trick) mess of interactions between banks.

    Although (if lending was straight – i.e. physical money from real savers to borrowers) it is hard to see what "bankers" are for (what function they serve).

    After all if I want to lend money to a person (to help him build a factory) it is hard to see what first giving my physical money to a banker (so that he can take his cut) and then him lend it to the factory builder, serves.

    The old argument was that the banker provides his or her "expertise" to the transactions – but as modern bankers "expertise" seems to be in building credit bubbles and sleeping with Central Bankers and politicians (in the case of Barney Frank – literally sleeping with) this argument would seem to collapse.

    Perhaps (just perhaps) better to lend real (physical) savings directly to people who, in the judgement of the real saver, are undertaking activities which will produce a real return.

    Clue – this does not include housing bubbles (or consumption binges generally) and government bond scams.

    Let alone the demented "financial instruments" that dominate activity in modern "financial centres".

    Although real returns are not really an option in the near future – due to the coming crash.

    But for those who survive (who will not include me) – they should think about rebuilding economic activity on solid foundations.

    And a basic principle of that is….

    Lending must not be greater than REAL savings.

    • http://vikingvista.blogspot.com vikingvista

      I asked 3 simple direct yes or no questions about your personal opinion regarding fractional reserve banking. Is the reason you won't answer any of them that you don't understand them?

  • Paul Marks

    Vikingvista – the last point (if you think about it) answers all your questions.

    Total borrowing (of all types) must never be greater than total REAL savings of PYSICAL money.

    I repeat that I am NOT making a legal point – I am making a moral and logical one.

    • George Selgin

      Paul, what you are saying makes no sense at all. It is the very nature of lending and borrowing of "physical" assets through intermediaries that the value of financial assets or IOUs tends to exceed that of the physical assets involved. I lend a cow to A, an intermediary, in return for A's promise to return the cow to me with interest; A lends the same cow to B, in return for a like promise from B. So: one cow, two promises, no harm, no foul.

      • Mike Sproul

        Except that if B doesn't pay A, and A doesn't pay you, there is both harm and foul. If the only security for A's IOU is A's possession of B's IOU, then you would insist that B's IOU be signed over to you when A lent the cow to B. Either that, or you would have placed 1 cow's worth of lien on A's other property before accepting A's IOU in the first place. Try it with a house sometime, and see if you can get lenders to carry $200,000 worth of IOU's based only upon a $100,000 house.

        • George Selgin

          Like I said, all lending is risky. And of course (in the absence of government bailouts) intermediaries don't survive if they continue to make excessively risky or insufficiently secured loans. The tendency, when it comes to banking, for some to hold the industry to be either inherently untenable or immoral or both because banks will occasionally fail is frankly silly. Applied to industry in general, this tendency would have it that we should put an end to all business activity, on the grounds that some people are bound to lose their shirts otherwise!

          No one, in any event, is "forced" to transact with a fractional reserve bank. No law, so far as I am aware, has ever prohibited the establishment of 100-percent warehouse alternatives. (Please don't bring up deposit insurance: what I am saying goes for the long history predating both that and TBTF.) No law prevents anyone from keeping cash in a safe or safety deposit box. To the extent that the law has ever had any say regarding bank's reserve-holding decisions, that say has ever been one commanding banks to maintain some minimum positive reserve ratio–never a "maximum" ratio! And of the few important 100-percent "banks" ever established, almost all have been government sponsored arrangements, usually subsidized or otherwise propped up by laws banning would-be fractional reserve rivals.

          I do sympathize with those younger students of economics, and of Austrian economics especially, who, having fallen under the sway of anti-fractional reserve propaganda disseminated by Rothbardians and their fellow travelers, have been tempted to jump on the anti-FRB bandwagon. But for the grown-ups responsible for so tempting them, I confess I have nothing but contempt. The a-prior grounds upon which they condemn FRB are utterly without merit, while a superabundance of empirical evidence flatly contradicts their positions. They are to Austrian economics what the Flat Earth Society is to geology, which is to say (to employ Leland Yeager's expression): an embarrassing excrescence.

          • Mike Sproul

            Not sure who you are replying to, but I have never breathed a word of opposition to fractional reserve banking.

        • http://vikingvista.blogspot.com vikingvista

          "Except that if B doesn't pay A, and A doesn't pay you, there is both harm and foul."

          It is just simple default. So if you believe default is "both harm and foul" then I suppose you could say this.

          "then you would insist that B's IOU be signed over to you when A lent the cow to B. Either that, or you would have placed 1 cow's worth of lien on A's other property before accepting A's IOU in the first place."

          Not necessarily. It is all part of the negotiation. When I choose to deal with A, my terms are based in part upon my assessment of A. I have not infrequently loaned cash, a book, a tool, etc. to an acquaintance without any thought of his other assets or use for the loaned item, without any concern whether he maintains any sort of reserves, and with perfect comfort in asking him for the item back on demand anytime I please. Sometimes I get defaulted on (usually only amounting to a delay in repayment), sometimes I don't. Of course if he keeps reserves (e.g. pooled cash/cows/tools/etc from other lenders), then I am LESS likely to get defaulted upon.

          Most likely if I knew about B what A knows, I would've instead loaned B the cow and deprived A of his arbitrage.

          • Mike Sproul

            An unsecured loan is more accurately described as a gift, and when it occasionally happens that such a 'loan' is repaid, the repayment should also be considered a gift. I don't know of anyone who claims that 'gifting' is fraudulent or that it increases the money supply. When debating fractional reserve banking, the focus should be on bona fide loans, not gifts.

          • http://vikingvista.blogspot.com vikingvista

            "An unsecured loan is more accurately described as a gift, and when it occasionally happens that such a 'loan' is repaid, the repayment should also be considered a gift."

            Definitely not so. At least not in the mind of the person who asks to "borrow" the item, nor in the person asks for it back. No, it is quite obviously a loan according to all parties involved both by intent and action. And like all loans, including those involved in fractional reserve banking, there is nothing inherently fraudulent about it as long as the terms are agreeable and in earnest.

            As to the lender's compensation, it needn't be financial or tangible.

            I think if you consult a dictionary you will see that there is no initial intent by either party to return a "gift". Any request to do so by a gifter commonly labels the party with the old stigma of "indian giver". Not so with a lender.

    • George Selgin

      Just to be clear, Paul, in case the "morality" of intermediated lending should not be sufficiently evident: In the example above, I understand that A is acting as my agent; because I am not in a position to expend resources to discover a worthy borrower to whom I may lend my cow, with reasonable assurance of having it returned with interest, or because I am otherwise unable or unwilling to execute the necessary contracts myself, I allow A to take on these tasks for me, in return for his own commitment to repay my principle with interest.

      Where loans of "physical" money are involved, the fungibility of that money allows a bank–which is just a name for an intermediary of money loans–to assemble loans from numerous creditors, and to lend funds so assembled to an equally diverse set of borrowers, all of which serves to reduce, ceteris paribus, the banker's prospects of being unable to meet his various commitments, lowering in turn the credit risk borne by individual bank creditors.

      For centuries persons with idle base money balances have found it convenient to relinquish them to bankers as a means for earning interest on such balances with less risk than they would incur by lending them directly, while also (in cases in which deposits are made in exchange for a bank's demandable debt instruments) having access to means of payment often far more convenient than physical (narrow) money itself.

      Of course, as with all forms of lending, lending through banks is not risk free. But that hardly makes such lending either unethical or imprudent. Those who, rather than wishing merely to oppose such regulatory interventions as serve to augment artificially the prospects of bank failures and financial crises, plead instead for banning bank-intermediated lending altogether, though they affect to argue as proponents of freedom and morality, in fact seek to arbitrarily limit the scope of freedom of contract, and by doing so make themselves far more deserving of the charge of immorality than the bankers whom they so loftily–and so uncomprehendingly–criticize.

      • http://vikingvista.blogspot.com vikingvista

        Professor Selgin,

        Is it your experience that students in the classroom tend to suffer these same odd impenetrable mental blocks regarding fractional reserve banking, or is it just a loud but fringe affliction isolated to Internet commentators? It requires a modicum of consideration to be sure, but frankly it just doesn't seem like rocket science to me.

        • George Selgin

          In fact I cannot recall any of the many thousands of students I've had ever seeming to have any trouble understanding FRB, or expressing the opinion that it is either immoral or necessarily excessively dangerous. I have also polled students, before lecturing on the topic, about what they think happens with the money they deposit in their banks, and found who believed that the money actually sat in bank vaults. But I must confess that these are senior econ majors, that most are mainly interested in earning passing grades, and that they do not necessarily reveal it when they hold opinions contrary to my own.

          • http://vikingvista.blogspot.com vikingvista

            I do take some comfort in that. Thanks.

          • VangelV

            Students tell the professor what he wants to hear. I doubt that many students interested in free markets feel comfortable with a monopoly central planning body that creates purchasing power out of thin air as it assists the financial sector in transferring wealth from productive individuals and savers to the banks and government.

          • George Selgin

            Well, VangeIV, I hope you will agree that, whatever else may discourage my students from taking exception to my own opinions, I doubt that they do so owing to the fear that I am hostile to opinions expressing support for free markets!

          • http://vikingvista.blogspot.com vikingvista

            "I doubt that many students interested in free markets feel comfortable with a monopoly central planning body that creates purchasing power out of thin air"

            I agree entirely. Hopefully, like me, they are unreservedly opposed to such a thing. Hopefully students of free markets are equally, and for similar reasons, opposed to those enemies of free markets who oppose free market institutions like fractional reserve banking.

    • http://vikingvista.blogspot.com vikingvista

      "I repeat that I am NOT making a legal point – I am making a moral and logical one."

      Repetition is definitely your forte. So in kind, I'll repeat myself too: Your anti-fractional reserve banking position is immoral. But because of your incapacity for logic, you are oblivious to it.

  • VangelV

    @ George:

    "…I doubt that they do so owing to the fear that I am hostile to opinions expressing support for free markets!"

    My point is that if you support the Federal Reserve you do not support free markets. And smart students will go along with what the professor wants them to say.

    • http://vikingvista.blogspot.com vikingvista

      "My point is that if you support the Federal Reserve you do not support free markets."

      Who here supports the Federal Reserve? You know, "fractional" is not synonymous with "Federal".

  • Paul Marks

    Vikingvista "fractional is not synonymous with Federal".

    I agree – as long as you are prepared to allow banks (regardless of size) to go bankrupt (and so called "depositors" to lose their "deposits") you have not adopted a statist position.

    Let the phony "boom" bust – let the "broad money" collapse back down towards the "monetary base" (the actual money).

    No banning of the "discounting" of the debt paper of big New York Banks (as the "National Banking Acts" of the 19th century tried to ban), no court supporting
    CONTRACT BREAKING (such as "suspension of CASH payments") none of this.

    Let people throw themselves off cliffs.

    Just no government safety net.

    No free-lunch.

    If people want loans that are more than REAL savings of PHYSICAL money – then people must accept the consequences of that.

    No "boom" without the bust.

    • http://vikingvista.blogspot.com vikingvista

      ME: "fractional is not synonymous with Federal".
      DU: "I agree – as long as you are prepared to allow banks (regardless of size) to go bankrupt (and so called "depositors" to lose their "deposits") you have not adopted a statist position."

      1. Is advocating state prohibition against lending by debtors a "statist position"?

      2. Otherwise "fractional" *is* synonymous with "Federal"? (I.e., can you not see how the basic semantics are being conflated and confused?)

      3. Who here has *ever* advocated NOT allowing anyone to go bankrupt or be defaulted upon?

      "Let the phony "boom" bust – let the "broad money" collapse back down towards the "monetary base" (the actual money)."

      Better yet, how about ending the statist policies that direct the "phony boom", so that fractional reserve banking can do its free market job of improving the distribution and coordination of real savings through re-lending?

      Along the same lines, how about not advocating additional statist policies such as imposed restrictions on fractional reserve banking that would tend to produce a less efficient distribution of real savings?

      "If people want loans that are more than REAL savings of PHYSICAL money – then people must accept the consequences of that."

      If the economic signals are not misleading, then an arbitrageur by definition is improving the distribution of resources in an economy. A debt arbitrageur–a re-lender–is choosing his loans within the context of his own debt and the prevailing economic circumstances. He is therefore taking real savings, and directing it to better use. Unlike central bank policies which frequently induce a misallocation of resources by causing a mismatch between interest rates and real savings, re-lending in a free market provides an IMPROVED allocation of resources.

      In a free market, the prevailing level of broad money, however many multiples of the monetary base it may be, is expected to reflect a more efficient allocation of real savings than would be produced if the broad money supply were involuntarily forced to a lesser quantity.

  • Paul Marks

    George – when I use the words "moral" and "morality" I refer to people knowing basic logical truths and choosing to ignore them (instead producing a web of words DESIGNED to obscure the truth).

    I regard this as immoral – because it is immoral.

    If total REAL savings of PHYSICAL money are 100 Dollars, total lending (of all types) should not be greater than 100 Dollars – otherwise there is a credit bubble (and it will eventually burst).

    You know this as well (indeed better) than I do.

    As both Mises and Hayek understood (at least Hayek before old age) the "Currency School" of the early 19th century were right ABOUT THE PROBLEM and the "Banking School" were WRONG.

    Sadly the Currency School people were "right about the problem – but wrong about the solution".

    It is quite possible that there is no solution.

    • http://vikingvista.blogspot.com vikingvista

      "If total REAL savings of PHYSICAL money are 100 Dollars, total lending (of all types) should not be greater than 100 Dollars – otherwise there is a credit bubble (and it will eventually burst)."

      Please explain how you know that an indebted lender cannot pay back his own loans.

      I don't expect you to start answering any of my questions at this late stage, so I'll just say that yours is an arbitrary unsubstantiated position. It is quite easy to see how a person can successfully re-lend. There is no level of indirection in relending for which one cannot imagine the successful payback of all loans. It is not reasonable to assume that the loans a debtor makes are of poorer quality or have lesser chance of success than the loans made to him. All lenders take their own economic circumstances into account when pricing and gauging the riskiness of their loans.

      If loans are bad (whether or not made by an indebted person), then some misdirecting signals must have tended to exist when the lender made his calculation–i.e. BEFORE he made his loan. Lending itself does not necessarily produce such a misdirecting signal.

  • Paul Marks

    "Please explain how you know that an indebted lender cannot pay back his own loans?"

    Vikingvista you are asking me to explain that a person with vastly less physical money than they give the impression (deliberately give the impression) they have, can not honour their promises.

    Even when they have promised more money than exists.

    Not just more money than they have – but more money than anyone has (more money than even exists).

    George Selgin.

    The promise of a cow is not a cow.

    And treating book keeping tricks as cows is not wise (although it may be very clever).

    Try milking one of these non-existent cows.

    I am sometimes accused of being a brutal and intolerant person ("execution first – trial afterwards"), but I do not believe that to be true. Although I was a security guard for many years, I am an average sized (and rather mal coordinated) person,and I certainly do not enjoy violence (in fact I have a horror of it).

    I just do not believe that intelligent people (far more intelligent than I am) really confuse ink in ledger books (or figures on a computer screen) with physical reality.

    This is not an intellectual mistake (by bankers and other such) – it is a deception.

    • http://vikingvista.blogspot.com vikingvista

      "Vikingvista you are asking me to explain that a person with vastly less physical money than they give the impression (deliberately give the impression) they have, can not honour their promises."

      No. I'm asking you to explain how you know that it is "inevitable" that re-lenders must default. That is your claim, and in spite of repeated queries for your theory to explain it, you have yet to come to the plate–even after I laid out for you my theory for why you are wrong.

      At any rate, this notion of private fractional reserve banks in a free market giving false impressions is utter hogwash and always has been. It's a complete fabrication. Either that, or you are some sort of anointed with unique and as yet unrevealed access to the grand conspiracy.

      Plumbers function as plumbers. Airlines function as airlines. Banks function as banks. Anyone wanting to know what a bank is can crack open an encyclopedia. Anyone wanting to know what a bank is NOT can crack open Rothbard. Anyone NOT wanting to know what a bank is has that prerogative. It is sufficient for a bank to call itself a "bank" without having to recite to each depositor the Collier's Encyclopedia article on "Banking".

      Your hangup on the "money" jargon appears to be getting in the way of your ability to understand this issue. There is nothing wrong with allowing others their established semantics. People who refer to "broad money" or "credit money" or "M2", etc. are well aware of what it means and how it differs from basic money. It doesn't matter if they call it "broad money" or "hippopotamus" so long as they know what they are talking about.

      Your criticism is entirely semantic and completely without substance.