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100-Percent Censorship?

Yesterday Brad Jansen alerted me to this post on Congressman Paul's website, in which Paul approvingly summarizes–not for the first time of course–Murray Rothbard's take on fractional-reserve banking. I responded with a comment, only to learn from Brad today that my comment had disappeared along with others (mostly laudatory) that had been posted on Paul's page.

It may be that the comments were deleted inadvertently; and if they were deleted on purpose this was almost certainly done by someone on Paul's staff, rather than by Paul himself, perhaps without Paul even being aware of it. The disappearance of the comments soon after I submitted my critical remarks is nevertheless disconcerting. (NB: Please see the postscript below for a follow-up.)

Fortunately Brad had in the meantime posted my comment on the Facebook Free banking page, saving it from utter oblivion, and allowing me to post it again here, minus a couple typos:

It is unfortunate that Congressman Paul has chosen to accept Rothbard's characterization of fractional reserve banking, thereby wedding his call for monetary freedom with an extremely mistaken idea of what such freedom would entail in practice. In fact bank "deposits" have been recognized both in practice and in common law since early modern times to consist of debt claims to money (coin, back then), ownership of which was in fact transferred, along with possession of the coins, first to the banker and then to the banker's borrower-customers. The original depositors retained a right to reclaim an equivalent sum of coin, sometimes on demand, and the banker's only obligation was to have sufficient coin on hand to meet any such demands, the normal penalty for failure to do which was failure. The contrary Rothbard view that bankers must be stealing whenever they lend part of their "deposits" is the sheerest poppycock, legally, historically, and economically, and has been exposed as such in numerous forums. That many persons, who apparently lack real knowledge of these subjects subscribe to it doesn't make it any less false.

Those who may be inclined to dismiss what I'm saying as the remarks of an apologist for central banking or inflation or (for that matter) theft should know that like Congressman Paul I favor monetary laissez faire, and have long done so, and as such believe that the sort of "warehouse" banks Rothbard prefers should be perfectly legal. But I also know that where true freedom in banking has prevailed, as it has on numerous historical occasions, such warehouse banks (which aren't really banks at all, by any standard definition) have never succeeded, their potential clients having generally preferred to patronize fractional reserve banks, despite the extra risks involved, for the sake of avoiding storage fees whilst gaining interest and free payment-related services.

Rothbard, in contrast, would ban "acts of fractional-reserve banking among consenting adults," and so, apparently, would Congressman Paul. Whatever such a ban might accomplish, it certainly can't be squared with monetary laissez faire, or for that matter with plain old personal freedom.

Although the first priority of every believer in monetary freedom must be to combat bogus arguments for monetary central planning, we cannot do this effectively unless we are just as relentless in exposing the 100-percent reserve movement for the moronic cult that it is, to keep its clownish convictions from giving the entire movement for monetary freedom, if not free market economics more generally, a bad name.

Postscript: Immediately after publishing the above, I learned from Larry White that my comment was back up on Ron Paul's cite. So it appears the deletion was inadvertent after all, which is a big relief, since I consider myself a Ron Paul fan.

Needless to say, my beliefs concerning the 100-percent reserve perspective remain quite unaffected by this good news.


  1. Of course, you ran into the anarchist, Lew Rockwell, pseudo-intellectual crowd who reject all information that conflicts with their worship of Rothbard, and all things anarchic. The entire enterprise is moronic, and Paul is their "Moron in Chief" – so don't expect anything better. As well, concluding that the re-appearance of your comment is evidence that they didn't take your comment down isn't based on fact. I moderate comments on several blogs and it's quite easy to take comments up and down – but it doesn't happen automatically. And it isn't at all surprising that these folks would eliminate comments from a serious academic expert on the topic, they have created their own faux intellectual reality, along with its own "academy", the Ludwig von Mises Institute (created and run by crypto-racist Lew Rockwell). I'm very glad you are not afraid to call out their intellectual nonsense for what it is. I only wish more libertarian academics would come out and debunk these guys more often. They marginalize and bifurcate our movement, leaving us powerless politically. It's a good thing Paul is finally retiring, perhaps we can leave the Paleo-Libertarian, Anarchist Man-Children on the side of the road one of these days and get on with serious work. Thanks!

  2. Great post, George. I especially enjoyed Professor White's testimony the other day regarding Fractional Reserve Banking at Paul's Congressional subcommittee hearing. A text of that speech can be found on this site. I found it a very succinct yet thorough repudiation of the most popular arguments against FRB.

    A critical argument in favor of fractional reserve banking, in my mind, is that it allows the money supply to adjust endogenously to changes in the demand to hold money, thus avoiding the negative macroeconomic consequences that would arise if banks were prohibited from adjusting their reserve requirements to utilize these new savings for worthy investment projects. So often 100% RR advocates like to claim their system avoids the boom/bust problem by avoiding the problems associated with excessive money creation. But they neglect the equally dire consequences that result form a deficient money supply.

  3. Calling your opponents in a civilized discussion "a moronic cult", and refer to their convictions as "clownish", isn't nice either. You won't persuade them by calling them names. Nor will it benefit the image of the "movement of monetary freedom".

    1. Rest assured, Pedro, I am no more interested in being "nice" to 100-percenters than I am interested in being so to central bankers. Nor am I intent on persuading them about anything–I've tried that, as have others, to no avail. Ridicule is no more than their just deserts. Those who are genuinely willing to be persuaded have only to take seriously the abundant writings showing them the error of their ways, and and to alter their views accordingly, in order to avoid it.

      1. The problem is that when you ridicule all of them, you are ridiculing both the recalcitrant 100-percenter and the person (perhaps a layman) who, having read a book by a 100-percenter, has been convinced by him, but wants to learn your arguments and genuinely be persuaded, if you are right. He comes here, and learns his current convictions are "clownish", and that he's a member of a "moronic cult" just because he might be wrong. But everyone is wrong about something sometimes. I understand that you are so convinced that your views are right and that those of 100-percenters are absurd, that it makes you angry to have them insist on them. But don't take it on the readers who have a genuine interest in the discussion, and might be wrong for the time being. This applies to central bankers too, of course: after all, most people believe central banks work.

        1. I appreciate what you are saying, Pedro. But my remarks aren't aimed at novices who are trying to form opinions on the subject of sound money, including those who, having mainly been exposed to the 100-percent side, have been inclined to agree with it for want of familiarity with other perspectives. They are aimed at the hard-core proponents of 100-percent reserves, consisting mainly of self-styled "Austrian" economists, and also at their devoted (I use the term advisedly) followers, who have been repeating the same falsehoods and nonsense for many years, without showing any inclination to modify their views in response to (I think) very compelling criticisms. On the contrary: having seen their claims falsified, they go on repeating them, without so much as hinting at the existence of contrary claims. These are the people who I consider clownish. As for others like yourself, I only hope you will keep on reading here (you will find a number of my earlier posts on the subject), and ask you to bear in mind that addressing what is in fact dogma as if it were mere misunderstanding is itself a dangerous intellectual error.

          1. Dear professor Selgin,

            I could make the same objection with respect to you. You repeat that demand for inside money is equivalent with demand for the services provided by the bank, be it bookkeeping or the payment of interest. But De Soto already pointed out that demand for the services provided by the bank, and the acceptance of bank liabilities as a medium of exchange are two distinct variables. Outside monies with different empirical features lead to different demands for inside money, different levels of credit expansion and different interest rate under FRB, even if all the other variables (e.g. time preference, productivity, etc) remain the same. In the extreme, when the transaction costs of outside money are sufficiently low, there is no inside money at all, no matter how high interest rates banks offer. Clearly, these situations cannot all be simultaneously macroeconomically optimal. So there is obviously a gap in the position that FRB is macroeconomically beneficial.

            Bitcoin provides empirical support for De Soto's argument that these two variables are indeed distinct.

          2. Peter Surda writes, "You repeat that demand for inside money is equivalent with demand for the services provided by the bank." Not so: I say that depositors prefer to hold inside money, and enjoy the interest and services connected to such, to holding 100-percent-backed claims that cannot freely circulate and for which they must pay storage fees. This doesn't imply that demand for inside money = demand for payment services. Typically, Mr. Huerto De Soto first misrepresents my argument, so as to be able then to pedantically demonstrate why it is wrong.

            I have, by the way, gone through every line of his magnum opus, and do not hesitate to pronounce it a quarto ream of sophistries.

          3. So, dear professor Selgin, you did not, in fact, write the following:

            For example, an increase in the public's demand for money means an increase in the aggregate demand to hold bank liabilities.

            ? You did not write it in "The Theory of Free Banking" and did not repeat it in your response to Bagus and Howden?

            Well, then there must be something wrong with my computer.

            Anyway, as I explained already, an increase in public's demand for (inside) money is distinct from a demand for bank liabilities. Whether a bank liability is or is not money is determined by transaction cost difference between outside money and the bank liability, not by whether people want to receive interest on their deposits or whether they like the services the banks provide. So, indeed, demand for inside money IS a demand for the payment services. Even nowadays, there are plenty of liabilities which are neither empirically inside money, nor are they considered a part of the money supply, irrespective of whether you take the definition of the money supply from the Austrians (Rothbard/Pollaro/Salerno) or monetarists (e.g. Schwartz).

            In the extreme situation (shown potentially by Bitcoin), if outside money has sufficiently low transaction costs, no amount of demand to hold bank liabilities creates inside money and the money supply remains inelastic. So, you're wrong. But the full reservists (at least the more prominent ones) don't understand this either so I'm not singling you out.

        2. Peter Surda, you evidently incline to sophistry also. Rather than worry that your computer is defective, consider please these two statements:

          (1) "an increase in the public's demand for money means an increase in the aggregate demand to hold bank liabilities."

          (2)"demand for inside money is equivalent with demand for the services provided by the bank, be it bookkeeping or the payment of interest."

          These are two distinct statements with distinct meanings, which you conflate by not distinguishing between the demand for exchange media and demand for payment "services" banks offer, e.g., keeping accounts, along with interest payments in order to attract deposits. I have made the first statement; I have never made the second.

          Decades ago, when banks were prohibited from paying interest on demand deposits, some gave toasters to clients as a reward for the opening of new accounts. Would you have me saying then that in that case those client's increased demand for bank deposits was equivalent to an increased demand for toasters?

          1. Dear professor Selgin,

            I see now, I was unsuccessful in getting my point through.

            My point is that inside money and bank liabilities are two distinct variables, not that there is something "wrong" with the demand. If they are two different variables, you cannot say that an increase in the demand of one of them means an increase in the demand of the other one. Similarly as you cannot say that fiat money is always elastic.

            Your example with the toaster is actually a very nice demonstration of my point. The toaster is not a part of the money supply. An increase in the demand for toasters does not necessarily mean an increase of the demand for inside money, as this additional demand can be satisfied without creating new inside money.

            The reason why we observe that sometimes an increase in the demand for bank liabilities is accompanied by an increase in the demand for inside money is that in the current system (and in one based on gold), outside money cannot provide the services the banks do (e.g. electronic payments, cheques, bookkeeping, in other words, lower transaction costs). Only inside money can. So if you want those services, the only way to get them is to obtain inside money, and the only way to obtain inside money is to obtain bank liabilities. But as White says, this is an empirical issue.

            Let me maybe quote Rothbard to explain this (Austrian Definitions of Money Supply):

            It is important to recognize that demand deposits are not automatically part of the money supply by virtue of their very existence; they continue as equivalent to money only so long as the subjective estimates of the sellers of goods on the market think that they are so equivalent and accept them as such in exchange.

            Here Rothbard emphasises the difference between a medium of exchange (inside money) and a bank liability. He selected trust as the factor that influences whether a liability is inside money or not. However, there is another factor as well (largely neglected by Austrians): transaction costs. If noone can produce bank liabilities that have lower transaction costs than outside money, then whatever bank liabilities might exist, won't become inside money, as noone would accept them as a medium of exchange. In other words, in such a situation, M0 = M1 = M2. Bank liabilities would be highly liquid financial instruments, but not money. As the demand for features which normally require inside money can be satisfied by outside money, there is no demand for inside money. There still can be demand for bank liabilities, for example to collect interest.

            So, let me try a bit of socratic interview on you:

            Do you agree that bank liabilities and inside money are two distinct variables and their quantities do not necessarily coincide?

            Do you agree that whether a bank liability is or is not inside money is primarily determined by the transaction cost difference between this bank liability and outside money?

            Do you agree with the aforementioned quote by White that whether bank liabilities have lower transaction costs than outside money is an empirical question?

            Do you agree that FRB with outside monies with different empirical features (i.e. transaction costs) would lead to a different interest rate and different reserve ratio even if the demand for bank liabilities, quantity of outside money or the changes thereof, and all the other variables would remain the same?

            Do you agree that these different interest rates and reserve ratios cannot be simultaneously all optimal?

          2. Or, let me put it in the simplest way possible: there exist bank liabilities which are not inside money. This alone proves that they are different variables.

  4. Whether a matter of "fraud" or not, the effort to lend out more money than was ever really saved ("cheap money", i.e. loans at a lower rate of interest than real savers would demand, what Ludwig Von Mises talked of as the endless quest for the fool's gold of credit expansion) has terrible economic consequences.

    First there is the credit-money boom – and then there is the (inevitable) BUST. Some people (normally the wealthy and politically connected) benefit from these boom-bust events, and some people (normally the poor and not politically connected) tend to be poorer than they otherwise would be without these boom-bust events. The overall effect is NOT a "zero sum game" it is a NEGATIVE sum game – as the economy is less productive with these boom-bust events than it would be without them.

    Calling people "morons" does not alter any of the above. And a lot of it has been known since the days of Richard Cantillon in the 1700s.

    It should also be pointed out that by "fractional reserve banking" the word "fractional" is not being used as it normally is. For example, in normal language, lending out nine tenths of real savings (of cash) would be considered a "fraction" (although a very large "fraction" indeed), but lending out 100 tenths (1000%) of real savings would not, in normal language, be talked of as a "fraction".

    Although YES in formal mathematics 100 tenths is a "fraction".

    Sometimes it is denied that banks (whether on their own or in their interactions) lend out more money than was ever really saved. This matter can be checked.

    It if was true that banks did not lend out more money than has been saved then bank credit ("broad money" M3 and so on) could never be bigger than the "monetary base". Credit expansion does occur – banks DO lend out more "money" than was ever reall saved. And this does lead to terrible boom-bust events.

    Any banker (or banker friend) who denies any of this should simply be asked to "SHOW ME the money" – i.e. the pile of cash that the banker (or banker friend) is claiming (by his denials) is in his vaults – "backing" his debt paper. If opened the vaults will prove NOT to contain the said pile of cash – and the denials will be exposed as false.

    However, all the above does NOT mean that state intervention will cure anything.

    For example, the British banking Act of 1844 (the Peel Act) did NOT prevent credit expansion. By limiting the issue of bank notes the Act simply led to banks indulging in credit expansion (i.e. creating boom-busts) in other ways.

    Also, at least in the 20th and 21st centuries (and before this outside Brtain and the United States – as Ludwig Von Mises pointed out "cheap money" has been the default policy of governments around the world for centuries causing vast economic harm that only by vast human effort has been worked around), government intervention has been directed to make credit bubbles (credit expansion) BIGGER (not smaller).

    For example, before the creation of the Federal Reserve system in 1913 credit bubbles on the scale of the late 1920s (the Benjamin Strong credit bubble) would have been unthinkable. J.P. Morgan and his friends would never, before the creation of the Fed, have considered creating a credit bubble on this scale (and they were the grandest scale bankers of their time – considered the ultimate bubble builders).

    In the past banking was a mixed profession.

    Partly a matter of investing real savings (the word "deposit" is, of course, wildly misleading as the money is LENT OUT not "deposited" – otherwise interest could not be paid). And partly banking was about credit expansion – creating credit bubbles (boom-busts).

    In their role as investors of real savings bankers performed a valuable service. But in their role as bubble builders bankers did great harm (perhaps I should call George Selgin a "moron" for denying that).

    What has changed is the BALANCE of the profession.

    In the time of J.P. Morgan (and so on) real savings (investing them in productive industry) was the central part of banking.

    Morgan and the others did indeed create (and play with) credit bubbles – but that was not the main thing they did.

    Today real savings (and investing them in productive industry) still exists – but today the credit bubble is the central part of the business.

    Someone like Jamie Dimon is not really like J.P. Morgan.

    For Morgan real savings (investing them in productive industry) was the main part of his work – creating and playing with credit bubbles (although an INCREDIBLY DANGERIOUS part his life) was not the central part of his work.

    For Dimon (and other modern bankers) things are the exact reverse. Real savings and the investing of them still exists – but it is a side issue.

    The central part of the life of a modern banker is the credit bubble – not real savings.

    Why the change?

    The pre 1913 banking position was certainly not a free market (as George Selgin has repeatedly pointed out, such things as the National Banking Acts prevented that) – but it was a lot closer to a free market than exists today.

    It is a century of INTENSE government intervention that has produced a situation where the CENTRAL FEATURE of banking and financial services is the credit bubble (is credit expansion – government backed credit-money expansion) rather than real savings.

    It should also be pointed out that without Central Banking (OR SOME OTHER FORM OF GOVERNMENT INTERVENTION) long term credit-money inflation (i.e. long term vast increase in the credit-money supply – let us not make the Irving Fisher mistake of talking about the "price level") is IMPOSSIBLE.

    Certainly banks can (and do) inflate the supply of "broad money" (bank credit) – this creates (in fact IS) the "boom". However, this inflation (this rottenness – this corruption) goes away in the clear out, in the "BUST".

    Only if GOVERNMENT (via Central Banks or in some other way) tries to "save the financial system" or "save the economy" by increasing the monetary base (to save the credit bubble – to save "broad money") can long lasting inflation occur.

    So, in the end, GOVERNMENT (NOT the banks) is responsble for the explosive inflation that has hit the United States since 1913.

    And please no talk about the Federal Reserve being "private" – its Chairman is POLITICALLY APPOINTED, it is no more private than Fannie Mae or Freddie Mac were private.

    Did the nationalisation of the Bank of England in 1946 improve matters?

    Of course it did not – and neither would the formal nationalisation of the Federal Reserve.

    Only the CLOSING of the Federal Reserve would fundementally improve matters – although the collapse of (the junkie like) "financial system" (which is now totally dependent on the drip feed of corporarte welfare from the Fed) would be terrible (truly terrible) it would end the vast corruption (the rotteness) that so twists both the economy (the capital structure – twisted into a vile mockery by malinvestment) and the basic life of civil society. Making an honest RES-PUBLICA impossible.

    I have been angry in the past at specific statements by George Selgin which I have held (perhaps UNFAIRLY) as not just false but as deliberatly false.

    However, Austrian School people should remember that George Selgin is just as much an enemy of the Federal Reserve as we are.

    George Selgin would also get a bulldozer today and knock down its H.Q. So that from the rubble of the (now utterly vile and corrupt – whereas in the days of J.P. Morgan and co it was only PARTLY vile and corrupt) "financial system" the hard work of building something decent could start.

    He is not an evil man.

    And, of course, it should also be remembered that whether the Federal Reserve is closed or not – the present junkie like economy (totally dependent on a drip feed of corporate welfare credit money) will collapse anyway – and a lot sooner than most people think.

    I remain of the opinion that it will start to openly collapse in 2013 (regardless of who is elected in November of this year).

  5. Dear professor Selgin,

    in "Quasi-commodity money", you insightfully pointed out that sometimes people merge unrelated variables together, for example by assuming that fiat money necessarily has an elastic supply. I am afraid that you are committing the same type of mistake here. You are merging the legal and economic status of fractional reserve banking together (as do, however, some full reservists such as Rothbard, Block, Hoppe, Salerno, Huelsmann and so on).

    But these are two unrelated variables. It is still possible that fractional reserve banking is legitimate (as you claim), yet it has a negative macroeconomic impact (as the full reservists claim). I subscribe to this point of view. Since we agree on the legitimacy of FRB, I'll just address the economic impact of it.

    The reason why people want to hold bank liabilities in form of media of exchange is not macroeconomic, but microeconomic. This has already been pointed out by De Soto when critiquing your position. People want to hold inside money because it offers features which outside money does not have, and thus decreases transaction costs of trade. They want to have a better money, not more of it! Paradoxically, it was professor White who realised this and in "Competitive Payments Systems and the Unit of Account" (1984) wrote:

    Coinage reduces transaction costs compared to simple exchange, because of authentication and weighing. Bank liabilities also reduce transaction costs. But these are empirical factors, and not something inherent in all possible monetary systems.

    Thus, if outside money already has very low transaction costs and other features normally only found with inside money, such as a ledger or the ability to exist in paper form, the demand for inside money (and thus their quantity) will be correspondingly lower, even to the extreme that no inside money whatsoever emerges. An example of how this can be done is Bitcoin. Even if fractional reserve banking is permitted in a Bitcoin economy, the money supply will still be inelastic (or at least much less elastic than with gold). Fractional reserve instruments would act similarly as company shares or bonds nowadays (highly liquid yet not money).

    PS. My paper about Bitcoin is nearing completion and should be published soon. I will let you know, as I reference several of your works.

    1. I think you're wrong about the current state of affairs with regard to bitcoin. Mt.Gox issues an inside money called "redeemable Mt.Gox codes" and I wouldn't be surprised if they maintained fractional reserves. I know that Silk Road has fractional reserves for their customer's deposits (a form of inside money) which they use to lend cash advances to their vendors. I'd be very interested in reading your bitcoin paper when it comes out.

      1. Mt. Gox codes, as well as balances of some other service providers, even if they were considered liabilities, are not inside money, as they are not considered substitutes by the Bitcoin users. They are only used for a narrow range of applications (trading against fiat money) and in many cases the ability to do something else with them is not even technologically implemented. Also, they are necessarily technologically incompatible with the Bitcoin network.

        Since they are not money substitutes, they cannot be used to expand the money supply. This means that there is a much stronger contrast between the deposit function and the loan function of the providers of these balances. If Mt. Gox wanted to loan out money, they cannot loan out Mt. Gox codes, they would need to loan out Bitcoins, i.e. their reserves. This would immediately raise suspicion.

        Silk Road operates an escrow service and a mixer, so this allows them to use the deposited Bitcoins for other purposes while the payment is being "processed". But both of these features are possible to implement natively with Bitcoin, and furthermore, the inability to use these balances for other purposes than buying or selling on Silk Road is a necessary condition, as opposed to a possible condition if Silk Road was a bank.

        There are fractional reserve services with Bitcoin, for example lending operators sometimes operate on fractional reserves and margin trading services (Bitcoinica, allow the use of leverage. This allows interest payments on the "deposits". Bitcoinica, while it was operating, even allowed for interest payments without maturity mismatch (as negative balances can be liquidated anytime if the operator deems so, so both the "lender" and the "borrower" have zero maturity), something that the full reservist Austrians imply is impossible.

        Behold! Bitcoin shows that fractional reserve banking is not a sufficient condition for the expansion of money supply. Let me repeat the Rothbard quote:

        It is important to recognize that demand deposits are not automatically part of the money supply by virtue of their very existence; they continue as equivalent to money only so long as the subjective estimates of the sellers of goods on the market think that they are so equivalent and accept them as such in exchange.

        I argue that they these instruments will probably never become accepted as equivalent in exchange, i.e. never become substitutes, as they cannot decrease transaction costs relative to Bitcoin.

        1. I see your point about them lending out actual bitcoins instead of their own deposits/codes. I've thought about this a lot too which is why I'd love to see your paper. You're right that it hasn't extended into full fractional reserve banking and I think you have a good point that part of that is the extremely low cost of bitcoin transactions. However, the examples I pointed to are a sort of budding of what we might imagine fractional bitcoin banking to look like, and the fact that these examples exist show that there are reasons for them to exist. Also, bitcoin transactions are not no-cost, in particular, the time to confirm payment and lack of strong anonymity are costs that could be mitigated by exchange media backed by bitcoin, but designed in a different way to allow instantaneous transfer and strong anonymity. Also, the flipside of lowering the cost would be increasing the benefit. I could imagine a bank offering you interest when using their exchange media, just how banks offer interest on deposits. This would incentivize people to prefer bank media to pure bitcoin. I don't think it's as cut and dry as you make it out to be or at least I don't agree with your conclusion.

          1. I address all those points in the paper, which I'll hopefully publish soon. Faster payments and greater anonymity can be provided by Bitcoin natively and there already are implementations that do that (green addresses / ZipConf for faster payments, mixers for anonymity). I admit however that it is potentially possible that Bitcoin denominated instruments can do this more efficiently and this would allow them to spread.

            Based on anecdotal evidence, it appears to me that Mt. Gox codes are mainly used to transfer fiat rather than Bitcoin (similarly as BitInstant).

            Interest can be achieved without being usable as a medium of exchange (see Bitcoinica) and I also doubt that this alone is a sufficient reason for the Bitcoin denominated instrument to become a medium of exchange. We have plenty of instruments denominated in fiat which bear interest, yet they are not media of exchange.

            Furthermore, the issue is not fractional reserve banking (which already exists), but expansion of the money supply (which doesn't). I don't actually claim that credit expansion with Bitcoin is impossible, but that it is unlikely.

  6. The issuing of fractional reserve notes and demand deposits is the issuing of a promise of payment of gold (or whatever commodity is used).

    100% reserve notes and demand deposits are property titles.

    If both circulate as perfectly different and non-homogeneous contract-titles everything is fine. If people will or will not accept both at par value to its physical nominal value is something to be seen although different discounts to different issuers was, I suppose something that happened.

    I do not think that historical examples experienced such a required distinction and it’s perfectly clear that it is in interest of fractional reserve issuers that this distinction is not made at all and the general public is not aware of it.

    So, free banking have very good arguments, the Rothbardian position also. Both are compatible in a clear labeling (and accounting) framework.

    1. Demand deposits are not property titles. Confusion on this point is what gives rise to the claims that lending of deposits is somehow "fraud".

      1. A demand deposit where I just deposit units of physical gold and where i expec to get the service of being possible to add/subtract units by acts of transfer to other accounts represents as such an acoount of property as currently in Goldmoney.

        My argument is that Freebanking must adress the diference.

        1. By the way, Goldmoney does not allow transfers anymore, since January, due to regulatory issues. So Goldmoney is not even a medium of exchange, it's just a store of value.

  7. Scott Burns – theoretically it is possible that there could be such a thing as a "deficient money supply".

    For example say a government declared that an element of which only one atom existed in the universe was legal tender and demanded that all taxes be paid in this element. Clearly this might well have dire consequences.

    However, this is unlikely to be the case with a commodity freely chosen (as money) by buyers and sellers.

    It should be remembered that a gradual decline in prices over time (as new and better ways of producing goods and services are developed) is NOT a bad thing (let alone a dire thing).

    A suddden CRASH in general prices is hardly the fault of "hard money" people – on the contrary, it is an indication that a credit-money bubble has been created and has (INEVITABLY) bust.

    The early 19th Century "Banking School" arguments that credit-money expansion was needed for "the needs of trade" were comprehensively refuted by the "Currency School" thinkers – who showed that such thinkingn (if put into practice) led to terrible economic consequences.

    Although the solution to the problem suggested by the Currency School thinkers (action against the issuing of bank notes) missed the point that bankers could find other ways of indulging in credit-money bubble creation.

    As both Ludwig Von Mises and F.A. Hayek were fond of saying – the Currency School people were "right about the problem, but wrong about the solution".

    As for the general idea of lending out "money" that has never really been saved….

    It is both wrong economically and wrong in moral terms (whether it is technically "fraud" or not).

    And, unlike Paul Krugman and co, I do not use the word "moral" with a little twisted smile and a sneer in my voice.

    Modern technology(and economic development over time) NOT credit-money expansion has led to the living standards of today. WIthout credit money expansion boom-busts living standards would be far higher (not lower) today.

    The fact that most people live better today than they did at (for example) the time of President Martin Van Buren and Senator Benton, does NOT mean that our modern rulers understand banking and monetary policy better than President Van Buren and Senator Benton did.

    On the contrary – people like President Van Buren and Senator Benton (whilst far from perfect – none of us are perfect, we are human beings) understood banking and monetary policy much better than our present rulers (in United States, Britain and so on) do.

    And certainly better than most academics (who tend to strangle their own minds with their technical terminology) do.

    I repeat what I have often said before – if you want to borrow 100 Dollars someone else must SAVE 100 Dollars. They must make a SACRIFICE of consumption – they must work for a 100 Dollars and then GIVE IT UP so that you may borrow it, and they only get it back when and IF you repay it.

    Seeking "cheap money" or "low interest rates" by monetary expansion is folly – terrible folly.

    I do not care if that is called a "moral theory of boom-busts" or not, as it is the truth.

  8. The claim 100 dollars must be saved before 100 must be lent is true, but the fractional reserves do not negate this. If I deposit 101 dollars and the bank lends 100 dollars, then there is no problem. And that is exactly what happens.

    One point many critics of fractional reserve banking miss, is that the extra 100 Dollars now in circulation are not an accounting fiction. A dollar lent is a dollar that must be repayed (with interest). The assets and liabilities are in balance. The bank may lend Fred 100 of your dollars, but Fred must pay 100 dollars plus interest back the bank.

    1. Exactly. One person can deposit money and use a checking account to pay without cash and the person to whom the bank lends the money can do the same simultaneously because that person must repay the bank and the bank must repay you.

      Some people hyperfocus on immediate monetary identities without considering that those identities are basically time travelers and it will all be sorted out when the banks settle up.

  9. David Johnson – one of my first points was that this is NOT what is meant by "fraction" in "fractional reserve banking".

    If 90 Dollars (nine tenths) or even 100 Dollars (ten tenths) of real savings were lent out there would be no "credit expansion", "broad money" (bank credit) would not be bigger than the "monetary base" – there would be no boom-bust events.

    I am sorry but the whole point of the dog-and-pony shows, smoke and mirrors, and shell games of bankers is to lend out MORE (vastly more) than ten tenths of real savings.

    The "extra Dollars" ARE (NOT "are not") "an accounting fiction".

    "But eventually it must all be repaid".

    Sure – that is the BUST part of the boom-bust. Prices (artifically maintained by the credit money "boom") crash and so on. And the bigger the boom the bigger the BUST – HAS TO BE.

    This is why (in spite of many boom-bust events) there was not a GRAND general inflation (by any defintion of the word "inflation") that actually lasted, before the creation of the Federal Reserve (leaving aside wartime experiments of course).

    Only if the MONTETARY BASE can be expanded (to "save the financial system", "save the economy" – i.e. save the credit bubble) is there a truly grand inflation over time.

    Otherwise each credit money boom (each effort to lend out vast sums of "money" that were never really saved – i.e. DO NOT REALLY EXIST) ends in a BUST with the credit money bubble heading down towards the monetary base.

    Bankers can do many terrible things – but they CAN NOT (on their own) create a long term Grand Inflation (they would all go bankrupt if they tried to do that).

    Only governments can do that – either via a Central Bank or other means.

    1. "one of my first points was that this is NOT what is meant by "fraction" in "fractional reserve banking".

      If 90 Dollars (nine tenths) or even 100 Dollars (ten tenths) of real savings were lent out there would be no "credit expansion", "broad money" (bank credit) would not be bigger than the "monetary base" – there would be no boom-bust events.

      I am sorry but the whole point of the dog-and-pony shows, smoke and mirrors, and shell games of bankers is to lend out MORE (vastly more) than ten tenths of real savings."

      Wrong. David Johnson's description is correct. The idea that more is being lent out than is saved comes from including the debt that the bank owes back to the depositor as part of the money supply. If the bank were actually to lend more than savings, the bank would go bust (in our theoretical world without the Fed and FDIC).

  10. Anyone reading the above should now understand (if you did not before) whey Austrian School people (Mises, Hayek and so on) got so vexed with Milton Friedman for his saying (repeatedly) that the Federal Reserve did not do enough to prop up prices and so on during the Depression.

    There had been a vast credit money boom (led by Benjamin Strong of the New York Fed – a hero to both Irving Fisher and Milton Friedman) so there HAD TO BE A BUST (prices had to crash and so on).

    The antics of the Fed just got in the way of what had to happen – and more antics (what Friedman would have wanted – "throwing money from helecopters", although in the 1930s that would have had to be autogyros) would have just got in the way even more.

    What would have happened had the Federal Reserve (which, compared to 1921, actually did quite a lot after 1929) "thrown money from helecopters" (again it would have had to be autogyros in the 1930s) is something we will soon discover – for this has been (basically) the policy of B.B. (if only that stood for "Bilbo Baggins") we wll soon discover.

    My own view is that, within a few years, the living may well envy the dead – but let us hope it is does not prove as bad as that.

    Back to the examination of the 1930s….

    And, of course, the desperate antics of Herbert "The Forgotten Progressive" Hoover (desperately trying to MAINTAIN wage rates – as he was in the grip of the "demand" fallacy) made things vastly worse they need have been.

    Laissez Faire WORKS (the cynic in me thinks that is why it is so rarely tried), if government does NOT back unions and follow wage policies and have welfare programs then WAGES DO ADJUST they are NOT "sticky downwards".

    And if government steps out of the way (in 1921 baseline government spending was CUT by 25%) then the economy will recover – as it DID.

    However, I doubt that a Warren Harding is going to be elected in November (Mitt reminds me more of Herbert) and the situation is going to be vastly WORSE than in 1921 anyway.

    Also (please remember) even Warren Harding was not perfect.

    He had no idea about internationl trade – an unthinking protectionist (but at that time internatinal trade was less important than it is now).

    And he had no idea about monetary policy – the Fed did nothing in 1921 by DEFAULT (old Woodrow Wilson appointments were not prepared to do anything dramatic – as they did not have political cover).

    When Warren Harding got around to appointing people – he made terrible choices.

    See Benjamin Anderson's "Economics And The Public Welfare".

    And Anderson was no enemy of the bankers – he was a credit bubble banker all his life (although even Anderson draws the line at the "United States Bank" an almost insanely crooked operation [almost as bad as a MODERN bank] that, for some reason, the late Milton Friedman had a soft spot for).

    Anderson was just not a fanatic who thought that any increase in the money supply was O.K. as long as the "price level" did not go up (as Irving Fisher seems to have done).

    1. Milton Friedman didn't say that the FED didn't do enough to prompt up prices, he said that given the current system and the responsibility given to the FED by Congress, the FED should have provided liquidity to banks that needed it instead of refusing to do its one and only job and deny the economy what it needed.

  11. If he removed your comment, that would not be censorship, as Rothbard would have pointed out. It's Ron Paul's property, and he has a right to remove anything from it he wants, for good or for ill. Censorship is something done by the State; editorial policy is a private affair.

    1. Come on, man. Professor Selgin is not claiming his "rights" have been violated. He's just complaining his comments were removed. Deleting legitimate comments is harmful to productive debate. If you will, it's against "netiquette". Professor Selgin's not claiming they don't have the right to do so. I bet he believes they do. But that doesn't mean they are right in doing it, and also he doesn't have to like it. The word "censorship" doesn't imply that it's the State the one doing the censoring: to censor is "to examine in order to suppress or delete anything considered objectionable" (Merriam-Webster).

      1. Merriam-Webster is wrong, as is Wikipedia. (The concept of "self-censorship", discussed at the latter, is an absurdity.)
        Censorship was started by the Roman censors, who were part of the Roman state. Show me censorship, and I'll show you suppression of speech by the State. Supression necessarily involves the use or at least the threat of physical force against a person or group being censored. Somehow I don't think Ron Paul would have used force or advocated using it against George. I'm not sure about the fattest economist alive, who regularly deletes stuff from his blog.

  12. Agreed Bill – just as George Selgin would be within his rights (this blog being his property) to remove the comment where I called him a liar.

    After all I did not call MichealM a liar when he made the original claim (that all bank loans are 100% covered by a bank's capital and reserves – these not just being MAGIC WORDS "capital and reserves" but actually having a physical meaning in actual cash) – as I assumed he did not know any better, I then ASSUMED (when George Selgin backed up Michael) that Prof Selgin did know better and was saying things he KNEW not to be true (i.e. lying).

    But I have no way of KNOWING that (I am not a mind reader – and an academic can get so caught up in technical terminolgy that they, honestly and sincerely, lose all contact with ordinary language) – indeed George Selgin would have been within his rights to call me out. I would have picked pistols.

    Not that I am any good with pistols (I am not) it is just that I am even worse with a sword.

    Of course most such affairs ended with both sides shooting in the air (or otherwise deliberatly shooting to miss) – the fit of anger haveing long past by the time of the formal event.

    However, one could never know that for sure – as Mr Hamilton found out. And I am so fat these days that even side on there is no way that George Selgin could miss me.

  13. Carlos Novais – what you are suggesting sounds very close to a literal meaning of the word "deposit" (as it was understood, for example, under Roman law).

    However, if that meaning is followed (if gold, or whatever commodity is used as money, is simply "deposited" with a person or enterprise for safe keeping and may not be lent out) then surely the person looking after the money (and making it available where the depositor happens to be) should logically CHARGE for their services?

    After all that is what a "safe deposit" enterprise does – and they do not even make the money available where the depositor is (one has to go to the them – to the phyical location of the enterprise).

    For example, when British banks suggested (some years ago) that they be allowed to charge for what are called "current accounts" here, I was supportive – but the screams of rage that the proposal attracted made the banks back down.

    Think about it…..

    People demand that the money be instantly available (whereever they are) and that the money must be 100% safe (which can only mean that it is NOT lent out – as no loans are 100% safe) yet they also demand that banks not be allowed to charge for all this.

    I am no banker friend – but this attitude (on this specific point) against the bankers, is unjust.

  14. Dr Selgin,

    Would a bank deposit be something recognized in the common law courts? As far as I'm aware of, common law deals solely with crimes (and torts) against real property, where it would be equity which deals with debts (and contracts in general).

    I always figured the main difference between the Rothbardians and Hayekian/Free bankers is that the Rothbardians are still fighting Simon de Montfort's fight: Preserving the common law as it existed at the time of the Provisions of Oxford and Westminster against the ability of the King to change it, which is what equitable jurisdiction essentially evolved into. Without equitable jurisdiction, fractional reserve banking (Both using deposits or bank notes) isn't possible as we know it.

    The only really weird thing is that they have a tendency to be contractualists par excellence otherwise. Of course, it makes less and less a difference every year, as there has been no formal distinction between common law and equity in many former common law jurisdictions for as much as a century. However, for the origins of fractional reserve banking it's a vital distinction.

  15. MichealM – like Mises, Hayek (till, perhaps, the last peroid of his life – when he got into "index money" and other nonsense) supported the Currency School against the Banking School (on the problem NOT on the Currency School solution).

    F.A. Hayek (at least in the prime of life) was opposed to the Irving Fisher "price level" ideology and understond that an increase of bank credit (i.e. the lending out of "money" that no one had really saved i.e. that DID NOT REALLY EXIST) must lead to a boom-bust.

    Creating credit bubbles was NOT what Mises (or Hayek – at least Hayek in the prime of life) supported when they supported "Free Banking".

    You will note that none of the above is about legal issues – it is about econonomic consequences.

    As for "fractional reserve banking" – as I have often pointed out, it is misleading to use the word "fractional" in a sense very different from normal usage.

    For example, "100 tenths" (1000%) may, mathematically, be a "fraction" – but it is not how the word "fraction" is used in normal language.

    Any denial that this is what banks do can (of course) be met with the polite (but firm) request to "well SHOW ME THE MONEY then". The vast majority of bank debt paper is, of course, NOT covered by actual cash (although it may be "covered" by magic words that have no physical reality – it is odd that "realistic" people who are so cynical about such things as morality are taken in by such hocus-pocus, or perhaps it is not odd at all).

    In reality "broad money" (bank credit) is vastly bigger than the monetary base (indeed that is the whole point of credit expansion). It is NOT "covered" – the thing is one great big shining lie.

    As both Mises and Hayek understood, the idea of "cheap money" (i.e. of credit expansion in order to get lower interest rates lower than REAL SAVERS would demand to give up consumption) is not a good idea.

    And this is using the word "good" in terms of economic consequences – not as in terms of ethical conduct.

    Although, of course, I do not believe that is is "good" in terms of honourable conduct either.

  16. Peter Surda – "regulatory issues", that says it all.

    Someone wants to buy and sell goods and services using gold as money, and the regulations come down upon them.

    But a vast credit bubble? A total lie and fraud (at least how ordinary people would define "fraud")? Well the authorities are fine with that – indeed they have spent the 20th and 21st centuries making these credit bubbles BIGGER (vastly bigger than even the most reckless bankers would have done on their own).

    I am remined of the effort in Indianpolis to issue real Dollars – with the actual precious metal available.

    The government came down upon the operartion – citeing the counterfeiting laws.

    The real fraudsters (the Federal Reserve and the U.S. Mint) are, of course, untouched.

    Those who seek justice from the government, or its courts, might as well seek chastity in a whorehouse.

    1. Oh I definitely agree. I'm just pointing out yet again that bank liabilities are not necessarily inside money :-).

  17. By the way – for those who object that in some areas of comercial law (once upon a time) justice could be found in government courts. And I am NOT talking about banking law here – I am making a general point to tidy up the area, as the matter of law has been raised by various posters.

    This was largely because some private (law merchant) principles were incorporated into the government courts.

    For example in England it was madness to seek to decide a commerical dispute in the government courts (Comon Law or Equity) before Lord Mansfield incorporated some Law Merchant principles into the government courts system.

    In Scots law Professor George Joseph Bell did what he could to make the government law and government courts sane.

    However, he died in 1843.

    In modern times there has been a move AWAY from rationality in the government courts. Partly because of statute law (which, to be fair, has always tended to be demented – a principle free zone) – but also due to developments with the legal system itself.

    Indeed more in the English (and American) Common Law courts than in the Scots Law courts .

    Even is such matters as contract law (once denounced the univesities as too hopelessly "individualistic" and "reactionary" to be "reformed") things are falling apart. And (I repeat) I am not making a specific banking law point – it is the general situation that is falling apart.

    In theory government law and the government courts might be returned to more rational principles – but I think it very unlikely to happen in practice.

    At least not till after the collapse of the present situation. Which will occur over the next few years.

    After the collapse who knows what will happen?

    I certarinly do NOT know.

  18. Hi, I have written quite a lot about the 100% versus fractional reserve standpoints. I think that most of the problem arises from a fundamental misunderstanding about what constitutes the money supply. In this article I argue that proper fractional reserve banking can be emulated 100% on the pure gold standard and I show exactly how this can be done. The only difference is that on the pure gold standard no-one would claim that the money supply increases, whereas there is continuous claims about the increase in money supply under fractional reserve banking.

    Here is another article to guide the understanding about fractional reserve banking:

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