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Reply to Salerno

Oh no: I've gone and punched the 100-percent wasp's nest again, and the wasps are responding predictably. Among them Joe Salerno stands out like a hornet among gall wasps, for Joe is an outstanding historian of monetary thought, and no mean monetary economist generally. Besides, you just can't dislike the guy. Were I forced by a libel suit to defend my claim about 100-percent reservers constituting a "moronic cult," he would probably be defense exhibit F, to be resorted to only if exhibits A through E all managed somehow to evade the process servers.

One reason why Joe woudn't do my case much good, besides the fact that he doesn't come across as a moron and is capable of charming jurors, is that he is not among those 100-percenters who insist that fractional reserve banking is fraud. On the contrary: he'd rather not talk about that, and goes so far to avoid doing so as to claim, at the end of his post, that the fraud argument is something I'm "fixated" on, as opposed to one that Rothbard himself and Salerno's MI colleagues have repeatedly raised, as well as one that has been particularly influential in building popular opposition to fractional reserves. Just search "fractional reserves" and "fraud" on Google and you will see the vast harvest of misunderstanding that this Mises-Institute fractional-reserves = fraud campaign has yielded. Even Congressman Paul has been taken in.

So why doesn't Joe want to talk about the fraud argument? My hunch, based in part on some past exchanges with Joe on the subject, is that he doesn't want to talk about it because he himself doesn't subscribe to it. But if that's the case, instead of pretending that it hasn't been a prominent and particularly influential component of his colleagues' criticisms of fractional reserve banking, why does he not join myself and others in discrediting it? His criticism would, after all, go much further in debunking the absurd claim than my own or that of other non-MI insiders.

In any event, it is the fraud argument that I particularly have in mind when I speak of a moronic cult. What I mean by "moronic" is what everyone means by it. A "cult," if you ask me, is a group that defines its members-in-good-standing as those who never publicly question certain core beliefs, where the core beliefs are in fact irrational or otherwise false. The last requirement is crucial, for otherwise the beliefs would not serve to distinguish loyal members from the great unwashed. You can't, for instance, form a cult around the belief that 2 + 2 = 4 or that that the earth is a sphere. But you can form one around the claim that space aliens are about to save the chosen from Armageddon, or that a drug-addicted commie charlatan is really Mahatma Gandhi's reincarnation, or that banknotes are really property titles.

Another sign of a cult is that, when publicly confronted with irrefutable evidence against their core claims, members respond, if they respond at all, by presenting modified versions of the claims designed, like so many planetary epicycles, to evade the original falsification, though only by erecting a different falsehood. Thus when the patent absurdity of their original fraud claim, to the effect that bankers were ripping-off their own depositors, was exposed (e.g., by pointing out that the "ripped off" depositors were receiving interest on their supposedly embezzled funds, and that were fraud really in play entrepreneurs ought to have been able to make a killing by exposing it while offering ironclad 100-percent alternatives), the "fraudists" (as I'll call them to save space) responded with a new theory, to the effect that, rather than defrauding their own clients, bankers and clients together took part in a conspiracy to defraud the rest of the money-holding public, by reducing money's equilibrium purchasing power. (Those conversant with welfare economics will recognize in this argument, among more obvious absurdities, a confusion of pecuniary and non-pecuniary externalities. In plain English, if by coming up with a new mousetrap, A reduces the market value of old-fashioned mousetraps owned by B and C, that effect is a "pecuniary" externality, and as such would generally not be considered evidence of a violation of B and C's property rights.) Confronted by arguments to the effect that the difference between either demand deposits or demandable bank notes and time deposits is a difference not in kind but merely in degree, the fraudists reply by claiming, as Rothbard himself never did, that fractionally-backed time deposits are also fraudulent, and should therefore be banned as well. (Cf. Emerson on foolish consistency.) By hook or by crook, in short, the fraudists remain wedded to their core beliefs, shrinking from no argument or ground-shifting, however fatuous, that might appear to rescue them from otherwise damning criticisms, if only by exposing them to others equally if not more damning.

So much for fraud and cults. What about the criticisms Salerno aims at me? He says that I've become a sort of "'standing joke" among young students of Austrian economics. Perhaps I have become such among students who have been drinking too much MI kool-aid; but most of the comments and correspondence I get after doing one of my wasp-nest acts, itself mainly from students, suggests a rather different reaction. Unless I'm mistaken what Salerno is observing is evidence of a self-selection process that is, shall we say, not lighting-up Mises Institute seminars and forums with only the brightest of sparks. (I've no doubt that for the same reason any reference to "globe-ists" at Flat Earthers' annual conventions is always good for a belly laugh.)

Turning to a (somewhat) more substantive criticism, Salerno tries his best to blacken me with the "Keynesian" brush by observing that I believe in money wage rigidities. Although the observation itself is perfectly true, the Keynesian tag is a calumny, and one that for once has Joe displaying a very faulty grasp of the history of economic thought. For as he ought to know, and as Auburn's own Leland Yeager has gone to great pains to make clear in his usual, eloquent manner (see his essay "New Keynesians and Old Monetarists," in The Fluttering Veil), Keynesians didn't discover or invent the idea that wages may be inflexible, which was a commonplace long before the General Theory was published, and one that played and continues to play a central role in the writings of both "Old" and "Market" Monetarists. What's more, if Axel Leijunhufvud is to be believed, Keynes himself based his own, peculiar arguments for expansionary monetary and fiscal policies not on the (then conventional) assumption that wages were sticky downward, but on his claim that, even if they weren't sticky, full-employment could not be recovered by simply letting them adjust downward. (As Yeager points out the beliefs of "New" Keynesians in this respect resemble not those of Keynes himself but those of "old" Monetarists.) Finally, Rothbard, who before the advent of New Classical economics was almost unique in supposing that there was nothing to prevent wages from quickly moving to their new equilibrium values following an adverse demand shock, was never able to hold this view consistently. In America's Great Depression, for example, he dishes it up in his early, theoretical chapters, only to go on to claim that Hoover contributed to the depression by resorting to policies that…kept wages from falling! Well, wage rigidities didn't suddenly make their appearance during Hoover's term, although he certainly made them worse, as did FDR to a still more destructive degree. Nor did they disappear when Truman took office. That wages did come down rapidly, along with other prices, following the post-WWI boom, thereby making for a short-lived bust of 1920-21, was partly due to the far less important role of labor unions in those days, and partly due to the fact that people had good reason to anticipate, and to therefore go along with, a post-war decline in equilibrium prices and wages.

The question whether wages are in fact rigid or not is, in any case, not one that can be settled by simply labeling the claim that they are rigid "Keynesian." It is an empirical claim, and as such one that can be settled only by referring to empirical evidence. I happened so supply some such evidence in the course of a recent exchange with the Market Monetarists, in which I posted the following graph:

Here, it seems to me, is rather compelling evidence of wage stickiness, as indicated by the utter failure of hourly compensation to adjust downward in response to a massive collapse of spending–a collapse that presumably ought to have meant a corresponding re-alignment of other equilibrium nominal values. If what Joe calls the "Keynesian" view of things is correct, the failure of wages to adjust with spending should have been associated with a corresponding rise in unemployment; if on the other hand Joe's own view is correct, there should be no close correlation between the "gap" between the series above and the rate of unemployment. I suppose my readers can guess which view squares most readily with the evidence, but here for good measure is the unemployment plot:

Don't get me wrong: I know that one can also tell a story about labor mis-allocation and consequent structural (as opposed to ordinary cyclical) unemployment; moreover I believe that that story gets to part of the truth. But why make it the whole story? Why pretend that unemployment only did what it would have done even if nominal spending had never collapsed?

As for the collapse in spending itself, allowing that it reflected "the voluntary decisions of individuals to alter the amount of money they desire to hold," it hardly follows that that made it harmless. On the contrary: the increased demand for money would, unless accompanied, and accompanied relatively swiftly, by a compensating decline in prices and wages, would necessarily imply a shortage of real money balances. By Walras' Law that money shortage would have as its necessary counterpart a matching surplus (excess supply) of things-other-than-money, including goods and labor. In other words, it would mean recession and unemployment.

As for my seeing ("like any garden variety Keynesian"–ouch!) "fluctuations in aggregate demand as a market failure that must be offset by Fed policy"…well Joe, I'm afraid that's really quite a howler, isn't it? I might have expected it from some others of the anti-fractional reserve persuasion, but from you? Say it ain't so Joe! Say that you haven't forgotten that I've written a thing or two about how AD wouldn't be so unstable were ours a free banking system. Say that you really do know the difference between a claim of market failure and one of government failure! Admit that when you suggest that I "want" the Fed to manage the money stock, it's to score a cheap point against me in the hope of impressing gullible reader's of The Bastiat Circle, and not because you really aren't aware of my desire to see the Fed abolished, along with all other central banks. As for my betraying my cause by endorsing Fed activism as a second-best solution, if that seems so, it is only because it's damn hard to point out that the Fed has screwed up without implying some "ideal" conduct that would have been better, which is surely not the same thing as imagining that the Fed can ever be expected to behave in such an ideal fashion. If that's betraying my ideals, call me guilty.

Joe's account of my ideas concerning how free banks evolve also bristles with misrepresentations. True, I say that eventually the banks might make do with very little monetary gold. But the transition to such a state of affairs would presumably be a very gradual one, and would proceed, not from some fictional 100-percent reserve starting point, but from that of established fractional-reserve ratios already in low double-digit (if not single digit) territory. So there's no reason to assume that it would involve substantial, let alone "massive," inflation. Neither is there any reason to suppose that bank money would "in effect become" fiat money. Nothing in the evolutionary process I describe points to a change in the status of note and deposit contracts as redeemable claims to standard money, and it is impossible to see how competing banks might convince their customers to voluntarily agree to any such change.

Fiction is also the word for Joe's predictions concerning other likely consequences of a move to free banking. Like many of his MI colleagues and followers, he here speculates as if the possibility being contemplated were a perfectly hypothetical one, for which actual empirical evidence is lacking. But that's just not so. Free banking has existed, not in some pristine version of course, but in approximations close enough to allow reasonable conclusions to be drawn about unregulated reserve ratios and such. So, did the most free of all banking systems, lacking central banks but also lacking any barriers to 100-percent reserve banking or subsidies to fractional reserve banks, exhibit the high reserve ratios to which Joe referred in testifying to Congress? Not at all. On the contrary, the freest systems, including Scotland's (ca. 1750-1845) and Canada's (ca. 1873-1914), had remarkably low reserve ratios. If 100-percent reserves are your thing, freedom in banking doesn't appear like a good way to have them. Better to call out the anti-bank vigilante squads, or just have the law itself set things right (as the fraudists would presumably empower it to do).

Concerning Joe's frenzied final paragraph, all I can say is that I hope he had himself a good stiff drink after writing it, and that he's feeling a lot better now.

  • Banknotes effectively are property titles, but they aren't title to deposited money. They are title to any bank capital, particularly the collateral securing a bank's loans, like titles to mortgaged real estate. I understand the distinction between equity and debt, but if a bank's creditors may claim the bank's equity before the bank's "equity holders", the distinction makes little difference. If I deposit a hundred dollar bill in a bank, and if the banker then uses my hundred dollar bill to light his fat cigar, the bank still owes me a hundred dollars. As long as he has any equity to burn, the banker burns his own hundred dollars, not mine.

  • will.luther

    I know it is exhausting to deal with these guys, George, but I appreciate you taking the time (once more) to do so.

    "Neither is there any reason to suppose that bank money would "in effect become" fiat money. Nothing in the evolutionary process I describe points to a change in the status of note and deposit contracts as redeemable claims to standard money, and it is impossible to see how competing banks might convince their customers to voluntarily agree to any such change."

    Indeed, George has an excellent article on the topic: "Adaptive Learning and the Transition to Fiat Money," The Economic Journal, Volume 113, Issue 484, pages 147–165, January 2003.

    "like any garden variety Keynesian"

    It seems to me that the phrase "Keynesian" gets thrown around a bit too much. What does being a "Keynesian" even mean?! Almost every macro economist accepts that prices do not adjust instantaneously, so that would seem like a pretty poor definition. On the other hand very few economists (e.g., Akerlof and Shiller) point to animal spirits. So, if that is what is meant by "Keynesian," virtually no one qualifies. I use to think that, at least in political discourse, the term was reserved for those in favor of fiscal stimulus. But, in recent years, it has become popular to call advocates of monetary policy "Keynesians" as well. The most fitting definition seems to be "one disagreeing with the issuing party on matters of Macroeconomics." What a shame it is to waste good words…

  • George Farnon

    Good Response. I understand you're trying to make the opposite point but its a bit cheeky that you use that version of the graph considering you said it misled you yourself no?

    • George Selgin

      Good one: I like readers who pay such close attention! The truth is that following the other exchanges, including comments on other blogs than this one, I am not quite certain which of my two graphs is closest to capturing the truth. Scott Sumner argues cogently for the first; Tom Dougherty no less cogently for the second. Either one serves to make the general point that w is sticky relative to AD.

  • Peter Surda

    Dear Professor Selgin,

    let us assume that FRB is legitimate and practiced, and a logical consequence of a free market (we both agree here). Answer me this please:

    – do you agree that if not all bank debt is a part of the money supply, then your claim that "For example, an increase in the public's demand for money means an increase in the aggregate demand to hold bank liabilities" is false?

    – do you agree that whether a particular debt instrument is or is not a part of the moneys supply depends on the empirical features of the instrument in relation to outside money?

    – do you agree that economies with different outside money but the same amount of debt would have different structure of the money supply and different interest rates?

    – do you agree that there could be outside monies (e.g. Bitcoin) which have so low transaction costs that inside money never emerges and FRB could have no effect on the money supply, and therefore your claim that "In a mature free-banking system, such as Ruritania's, commodity money seldom if ever appears in circulation, most of it (outside numismatic collections) having been offered tot he banks in exchange for inside money) is false?

    – do you agree that that is highly suspicious, as these different economies cannot be simultaneously macroeconomically optimal?

    These are, in my opinion, easy and fundamental questions, and surely someone who has studied Austrian economics 10 times longer than me should not have a problem answering that?

    • George Selgin

      Peter, I think I've been very careful regarding claims I make about demand for money (see here my reply to Bagus and Howden, who try their best to show that I haven't been careful). So, briefly (for I have already covered this ground):

      (1) Not all money consists of bank liabilities; (2) not all bank liabilities are money; therefore (3) you can have an increase in demand for bank liabilities that isn't an increase in the demand for money, as well as an increase in the demand for money that isn't an increase in bank liabilities."

      But when you ask above, "do you agree that if not all bank debt is a part of the money supply, then your claim that "For example, an increase in the public's demand for money means an increase in the aggregate demand to hold bank liabilities" is false?", I cannot help accusing you of attempting a shoddy trick, for the statement you quote from me is here stripped of context: the context makes clear that I am stipulating an assumption that was to inform further discussion, not making a claim about what must necessarily be so. By stripping out the context you make me appear to claim something I never claimed, and never believed, presumably so that when I spelled-out (as I do above) my understanding, you could shout "gotchya!" (I beg those who doubt what I claim about the quote attributed to me to search for it in my Theory of Free Banking, where they can see the context for themselves.)

      Concern the other statements: Particular debt instruments: well, features matter, but there's no fast line separating money from not money; different structures and interest rates: yes on structures I suppose (depending on what it means), not to interest rates, which converge once expressed in a common unit (see Joseph Conard); inside money vs. bitcoin: I don't see why you couldn't have inside-money issuing fractional bitcoin intermediaries, so, no to the second part; highly suspicious…macroeconomically optimal: you've lost me.

      • Peter Surda

        Dear professor Selgin,

        thank you for your reply.

        Let us look at the whole paragraph then if you worry about context:

        A demand may exist for either of two kinds of money: “base” or commodity money—the ultimate money of redemption—and inside money (bank notes and demand deposits) redeemable in base money. In a mature free banking system, commodity money does not circulate, its place being taken entirely by inside money. Such being the case, the unqualified expression “demand for money” used in this study will henceforth mean demand for inside money. For example, an increase in the public’s demand for money means an increase in the aggregate demand to hold bank liabilities. Unless otherwise stated, a change in demand will refer to an autonomous change in both real and nominal demand, meaning a change not itself induced by any exogenous change in aggregate nominal income.

        Here you make it clear that people use inside money as a medium of exchange, and then continue by establishing a link between the demand for this substitute medium of exchange with a demand for debt. This is erroneous and you cannot wiggle out of it by complaining about the context. And you even admit that I'm right and they are not the same!

        Now, the full reservists commit a very similar blunder so don't take this as an "anti-frb" argument. People demand a substitute medium of exchange because it is a better medium of exchange, not because they want debt. Similarly as people hire tax accountants to decrease their tax liability and increase their tax compliance, not because they want to give money to the government. If we have anarchocapitalism and no tax, there is still demand for accountants but not for tax accountants. Similarly if outside money has sufficiently low transaction costs, there is no demand for an alternative medium of exchange and there is no inside money, but there is still demand for loans.

        The reason why the distinction between "money" and "non-money" is vague is due to the widespread use of inside money as a medium of exchange. This is an empirical issue however. Bitcoin is form-invariant so this problem does not exist with it.

        Debt instruments issued by fractional Bitcoin intermediaries do not decrease transaction costs, so they are not used as a medium of exchange (and, I argue, probably never will). There are plenty of Austrians who claim that people use debt instruments as medium of exchange because they decrease transaction costs: I found references by Schlichter, Hoppe, De Soto, Salerno and even White. You appear to be the only one implying that they use them because they satisfy demand for debt. You know, because if they are not demanded due to increased demand for debt, then your whole argument collapses.

        Full reservists object to expansion of the money supply, but not to creation of debt. So clearly they must think that the structure of money supply in the economy influences the interest rate even if the amount of debt is the same, and economies with full reserves and fractional reserves are different. And you do not object to that by claiming that they are the same, but that the one with FRB is beneficial. And now you say that they are the same! Can you please explain how this is not a contradiction?

        How can simultaneously FRB be beneficial and the structure of money have no effect on the interest rate?

        • George Selgin

          "Here you make it clear that people use inside money as a medium of exchange, and then continue by establishing a link between the demand for this substitute medium of exchange with a demand for debt. This is erroneous and you cannot wiggle out of it by complaining about the context. And you even admit that I'm right and they are not the same!"

          Honestly, Peter, I have no idea what you mean. I've assumed a situation in which the public holds no reserve money, only bank liabilities that serve in place of such. I then say, in light of this, that henceforth I will treat an increase in demand for "money" to mean an increase in demand to hold such bank liabilities. Why you find fault with this is something I just can't fathom. Perhaps someone else on this forum can see the problem, but i sure cannot.

          • Peter Surda

            Dear professor Selgin,

            my point is not that the situation you describe cannot happen, but that you misrepresent the economic foundations thereof.

            If bank liabilities do not act as a medium of exchange, then logically the amount of deposits is smaller than if they are. The extent to which (fractionally issued) bank liabilities are accepted as a medium of exchange influences the changes in the money supply.

            You claim that FRB results in the "correct" money supply, but full reserves do not. However, if people do not accept bank liabilities as a medium of exchange, this results in the same money supply as if there were full reserves, even if banks operate at fractional reserves. How can these two be simultaneously correct?

          • George Selgin

            Peter, I assume that the liabilities of which I speak do in fact serve as exchange media, having supplied my reasons for so doing in the chapter preceding the one from which the passage you quoted was taken. You have to consider the whole argument as I develop it from the start of my book, not just a slice. My conclusions about how money supply behaves under free banking are, I'm pretty sure, correct given the stated assumptions upon which they are based, and those assumptions themselves are, I believe, reasonable, as I endeavor to show in the chapter to which I just referred.

            Now you may disagree and show that my results don;t hold even granting my assumptions, or that my assumptions themselves really aren't reasonable; but you can't claim that I'm wrong because my conclusions don't follow from assumptions other than those I myself employed in arriving at them.

          • Wildberry

            Dr. Selgin:
            I am not surprised you have no idea what Peter means. I can see the problem. I spent over a year trying to converse with Peter Surda and his intellectual Rothbardian cohorts, only to find them, well, something of a moronic cult, meaning that any time even a question of the legitimacy of any aspect of the entire and complete framework of Rothbard's political philosophy arose, the dogs came out to shut down the errant voice.

            This is particularly true in the case of Rothbard's broad assumptions concerning anarchy, to which all further analysis must conform. Consequently, in order to deal with simple real-world situations common in a modern society, like easements or copyright law, they must defend what appears to me (and most, based on the demographics of their “movement”) the absurd position that no rights can be legitimate that don't conform to, say, the first possession rule of property rights, as if that settles all legal problems, and ends the need for further discussion on the relationships between law, economics, and social institutions, (including banking).

            The parallel with your position is that free actors may CHOOSE transactions that violate the purist principles of Rothbardian anarchism. For example, if the premise is the non-aggression principle, then anything that one opposes is simply defined as aggression; problem solved. No need to refer to concepts like “net social gain” or “economic externalities”, which can be summarily dismissed a “utilitarian” and “irrelevant”.

            Fractional reserve banking is a market option that apparently has advantages to the parties to the transaction, the very essences of the freedom to contract. This would appear to be a viable option, even if we assume the complete absence of a central bank. The only argument is the straw man of “fraud”, applied to any arrangement that is short of 100% reserves. 90% is completely out of the question?

            This is, in my humble opinion, the root of the cultish adherence to the idea that what free market traders might (and do actually do) choose, must be prohibited in the world of Rothbard, and thus must be labeled with a hyper-epithet like "fraud" or "theft", despite the complete perversion of the common understanding of those words.

            As an aside, I understand your criticism of pseudonyms, so for the record, I blog under the nym Wildberry, but my name is Robert Berry, I am an attorney in San Francisco and work at a national bank.

            Keep up the good fight. My impression of you is as the Richard Espstein of banking, one of the highest compliments I know how to give.

          • Peter Surda

            Dear professor Selgin,

            thank you for your reply. It looks like I'm starting to get a bit through, so let me reformulate my argument based on your latest post.

            In full reserve banking, transaction costs have no effect on the money supply. In fractional reserve banking, they do. However, your model does not contain this variable. Therefore your model is not a correct representation of fractional reserve banking and needs to be rejected.

          • Peter Surda


            you consistently for years (since December '09 if I'm not mistaken) fail to formulate coherent arguments, answer questions or resolve the contradictions you produce. And if everything all fails, you just divert the attention, AKA the Chewbacca defense, or just run away pretending you won.

            Kindly note that I several times said that I agree with professor Selgin that there is nothing wrong with fractional reserve banking from legal point of view. My claim about legality of FRB is also valid within the Rothbardian/Kinsellian framework (TTTC) and in my upcoming paper I devote several pages to explaining this. My objection to professor Selgin does not concern the legal aspect of FRB, but misrepresentation of the economic nature of it.

            Unlike you, professor Selgin actually can argue coherently, so there's a good chance he'll either point out where my argument is wrong, or admit that I'm right.

          • Peter Surda

            By the way Wildberry,

            I several times said to you that my argument is not that IP and other legal "inventions" are illegitimate, but that the proponents thereof are unwilling to formulate their position without contradicting themselves.

            So yet again your post is a fail.

          • Wildberry

            It only took Prof. Selgin a couple of posts to catch on to you. That is why he is a professor and I'm not. I'm a little slower ont he uptake.

            Take this:

            I several times said to you that my argument is not that IP and other legal "inventions" are illegitimate, but that the proponents thereof are unwilling to formulate their position without contradicting themselves.

            On the one hand, you have no opinion as to whether it is or is not legitimate, or you now claim you don't after supporting Kinsella and others in their opposition on principles (i.e. strict and limited anarchist property rules).

            Second, and this is the fun part, you use ambiguity to create contradictions, and then use them to "falsify" whatever your "opponent" says.

            Cheap, transparent, and a waste of time. Your paper is sure to disappoint.

          • Peter Surda


            there are still open questions which I asked you through the years. If you don't want to answer them and instead play your games, I'll continue to think of you as a liar and a fraud.

            I do have an opinion on whether IP is or isn't legitimate, but that is not my argument or my reason for agreeing or disagreeing with Kinsella.

            I have reformulated my arguments again and again, and asked you repeatedly what you don't understand. You didn't reply. Your claim that I use ambiguity to create contradictions is easily recognised as false by anyone who reads through the posts I made.

            And I already said all this in the past. Your attempts to keep me involved in this game of yours are not going to be fruitful, because I am not interested in playing games, I am interested in logic.

          • Wildberry

            My, you guys sure like the word "fraud", although I'm sure I'm not alone in not having the foggiest notion of what you mean by it, other than trying to tap it's power as an invective.

            Perhaps you should figure out what it actually means, or tell us what you mean by it?

            For example, why is frb a fraud?

          • Peter Surda


            you're not committing fraud in the legal sense that I know of. You're a fraud because you pretend to argue, but instead just play your games.

            I did not claim that FRB is fraud, in fact I several times wrote that I agree with professor Selgin that FRB is not fraud. While I do not know for sure why you bring this up again, I suppose it's just a continuation of your game. In which I am not interested.

          • Wildberry


  • Paul Marks

    will.luther it is true that the word "Keynesian" is sometimes used when "Fisherite" might be better – as it was Irving Fisher who actually spread the doctrine that an increase in the credit-money supply is O.K. as long as the "price level" does not go up, indeed it was Fisher who really gave the final big push to redefineing the word "inflation" from an incease in the money supply to an increase in the "price level" (what George Selgin might call the "cult" of indexes).

    Even the Keynesian doctrine of "monetary stimulus" is much older than Keynes himself (as he himself half admits – citing Major Douglas and others), indeed Hunter-Lewis (in "Where Keynes Went Wrong") quotes Karl Marx mocking what would be called "Keynesian" doctrines before J.M. Keynes was even born. This is a bit of a problem for Marxists – as, since the time of the Italian Marxist P. Straffa in the late 1940s, many Marxists have been in the habit of mixing in Keynesianism into their own doctrines.

    Martin Brock – the legal issues (both in Roman law and Common Law) of banking are explored in de Soto's work "Money, Bank Credit and Ecomomic Cycles" (which also deals with a lot of other things – as the title suggests).

    However, what you say here is not really clear. When banks issued "bank notes" they were claiming to have the stuff that the bank note said they had. Sometimes they had this stuff (gold, silver or whatever the note claimed they had) and sometimes they did not.

    As for "bank capital" and "collerateral securing bank loans" – in practice this often turns out to be mist and fairy rings, but even if it was real it would not have anything to do with banknotes. The historical banknotes did not say another about "bank capital" or "collateral securing bank loans" on the notes.

    Historically the Bank of England stopped handing out gold when presented with one of its banknotes in 1931, the Federal Reserve stopped doing that for private citizens in 1933, and for governments in 1971. The reason for the stopping of the handing out of the (PROMISED) gold was the same in each case – the bank (or other such) did not actually have enough gold to cover the notes it had issued (indeed the gap had become extreme).

    I can not give you dates when banks stopped handing out "bank capital" or "collateral securing bank loans" when banknotes were presented – but certanly these words did not appear on banknotes.

    By the way…… mortgages (and mortgage backed securties) are notorious even among credit bubble bankers. For example, Benjamin Anderson (NOT an enemy of fractional reserve banking – indeed it was his whole life) describes as "The First Principle of commercial banking is to know the difference between a bill of exchange and a mortgage" (indeed he presents this as saying that was old even when he was young), and that any bank that acts as if mortgages were like bills of exchange was unsound (page 233 "Economics and Public Welfare). Nor is it just a matter of second or third mortgages – the scam of "mortgage backed securities" is old (there were cases of it as far back as the 19th century – and "surprise" it always ends the same way).

    And, of course, any bank that treats its own stock as if it were "captial" (that could somehow "secure loans") is run by a bunch of crooks who should go to prison (also page 233).

    If you do not understand "why" then I would advise you to watch a British comedy film called "Carry On Up The Jungle" – about a group of exlorers searching for a bird that vanishes up its own ……….

    I repeat that Benjamin Anderson was NOT an ememy of fractional reserve banking – he just was not a "moron" (to use George Selgin's word) who was a member of a "cult" (again to use George Selgin's word) that holds that as long as someone is called a "banker" they can do anything they like – stuff that if anyone else did it would land that person in prison. Of course Anderson (being what he was) wanted (indeed expected) to be allowed to do certain dubious things (highly dubious things) – but he did not demand a "blank cheque" (or "get out of jail free" card from a game of Monopolly) legally.

    As I (and many others) have often said……

    The 19th century saying "free trade in banking is free trade in swindeling" does NOT have to be true, it is only true if a banker is ALLOWED to swindle.

    Free trade in other professions does not mean a license to swindle and "Free Banking" does NOT have to be based upon cons (and so on) either.

    Although YES (as I have also often admitted) the situation can be made very complicated and there is no guarantee (none whatever) that any legal framework will stop the determined con man. And the most damageing conmen do (and always have) present as vast and respectable operations – with grand H.Q. buildings and lots of really important people ("the great and the good") on the Board of Directors (this is nothing new – John Law operated this way back in the 1700s).

    And YES the worst con men CON THEMSELVES.

    "I am not conning anybody" (they tell themselves) "this time it will be different – the scheme [for "cheap money" or whatever] will work this time…."

    And it is not just bankers…..

    Robert Maxwell sincerly believed that (when things got better) he would put back the money in the company pension fund – he was doing what he did "for the good of everyone" to keep the company going.

    The people over at Enron sincerly believed that if debts were owned by other enterpries they were NOT Enron debts – even if these other enterprises were owned by Enron.

    And on and on…..

    If someone offers you a deal that is "too good to be true" – that is exactly what it is. Let "the buyer beware". I only wish my own father (now dead) had been less trusting of respectable businessmen and their wonderful looking books.

    Turning to George Selgin's argument…..

    None is really presented in the post. There are a lot of words in the post – but no argument.

    There is no argument for lending out more money than was actually saved – credit expansion (lending out money that was not really saved i.e. money that does not really EXIST).

    No refutation of the problem that credit expansion (lending out "money" that was not saved) will lead to a boom-bust.


    Actually I could construct an argument for George Selgin's version of Free Banking…..

    "Listen people……. whatever you try and do legally the guys at the banks are a lot smarter than you (otherwise you would be on the sort of income they are) and they will find ways round it.

    So let there be credit expansion (because you can not stop it) – and YES there will boom-busts, but they will be a lot SMALLER than there would be with Central Banking, and as each bust will liquidate the credit expansion (and the malinvestments that go with it) of the boom, there will be no long term grand inflation".

    There you are – an argument for George Selgin's version of Free Banking.

    Free of charge.

  • I was once one of those who regard fractional reserve banking as fraud but I was convinced by the evidence, but if all that you have known is a single monopoly currency it may be quite rational to want to end fractional reserve banking. Fractional reserve banking with a single monopoly currency seems dangerous. It seems to me that the Fed's job is nearly impossible. I am therefore reluctant to call the those who want to call fractional reserve banking as fraud cranks. Who can look at the great depression, great recession and 1970s and not call out for reform of some kind?

    • George Selgin

      Floccina, what's dangerous is the monopoly bank itself, not fractional reserves, for the other non-currency issuing banks also have fractional reserves, but are not able to generate inflation on their own or to otherwise manipulate the money supply the way that the central bank can. The problem, in short, is monopoly, not fractional reserves. And why do you suggest that the "fraudists" are the only ones who understand that the fed's job is impossible, and who seek reform because of that? The free bankers also argue that central banking doesn't work, and also call for radical change. Of course the fraudists aren't cranks because of the views they share with free bankers. They are cranks only to the extent that they keep repeating claims about fraud that have no basis in fact.

      • Wildberry

        The Fed's problem is no different than any other form of central planning; the impossibility of calculation. The fact that the Fed is the ultimate source of monetary policy just makes the problem extreme. Monopoly is an extreme case of a central planning economics. It cannot work for the reasons that Mises and Hayek explain with brilliance and simple clarity.

        The problem with highly centralized social institution is that the benefit is also monumental. The fundamental complaint is not that it doesn't work, it is that it doesn't work for most of us. That is the ultimate complaint with socialism as well, and the parallel is not accidental.

  • David Stinson

    While I am fond of the Mises Institute and appreciative of its contributions on many fronts, I have never understood the 100% reserves thing, particularly after being exposed to your and others' work on free banking. To me, free banking is a magnificent example of an undesigned, market-coordinated order that yields a result that seems to a rationalist frame of mind to be a dangerous high-wire act but which in fact is stable and efficient. Perhaps it's the fact that FRB sort of looks like the banking system as a whole is getting away with something – the "out of thin air" thing. But I don't understand why the MI branch of the Austrian School, which clearly recognizes that free market results embody considerations beyond the capability of any one mind, no matter how rationale or well-informed, to understand or evaluate, seems guilty of exactly that sort of second-guessing when it comes to FRB.

    Now to be fair, the idea of 100% reserves seems to exercise some sort of strange attraction. IIRC, I believe James Buchanan endorsed it not that long ago and I think I read (perhaps in your work?) that Milton Friedman may have flirted with it as well.

    What is Joe Salerno's assessment of the classical gold standard – presumably it was not a 100% reserve standard?

    On the sticky price front, I think the MI position is that sticky prices, if endogenous or voluntary, are only coordinating not discoordinating (i.e., they promote or are the result of exchange), and the bad type of sticky price originates solely with government policy or coercion. Therefore, I assume they see an inflexible money supply as a way to discourage government-imposed inflexibilities.

    • George Selgin

      David, the sort of 100-percent reserve banking that Friedman and Buchanan toyed with was quite distinct from the Rothbardian variety. I discuss it here.

      • David Stinson

        Thanks George. I had forgotten that excellent post (even though I commented on it!). Is it fair to say though that the Rothbardian attachment to 100% reserves depends not only on its ethical basis but also, like, the Chicago 100-percenters, on a mistaken perception that FRB was unstable?

  • George, I suggest you actually read Rothbard's books, The Mystery of Banking as well as Man, Economy and State. You seem to miss the whole basic reason as to why Rothbard proclaimed so adamantly that FRB was a coercive tool of swindling by the banks. It was this very method of banking that led to ratcheting powers of the state. Friedman subscribed to the very mainstream methods of positivsm, where Rothbard used Mises' basic fundamentals of praxeology and subjective value scales. Indeed if you are to even call yourself an Austrian Economist, you should find it incumbent upon yourself to see where prominent economists like Joe Salerno come to such conclusions. Rothbard laid it out in serene context. As economists like Robert Murphy, or even Salerno himself, have studied the jargon you seem to uplift as impeccable, they challenge it straight on. Furthermore, Rothbard points out the flaws in the neoclassical system as well as Fisher himself in Man, Economy and State. It would save you a lot of time and you could stop making yourself seem like a foolish libertarian by chiding Ron Paul, the father of Austro-Libertarianism in the political realm, if you just sat down to read the damn books. Remember, Salerno gave you Rothbard's quote, and Rothbard made clear that in Free Banking FRB would dissolve as Monopolies dissolve. Perhaps you are too busy hugging your statist degree and worshipping your over-priced education, but let me remind you that Rothbard studied at better programs than the ones you did. Mainstream popularity does not give you more credibility than an underground freedom fighter, it just shows that the state agrees with you and you with them.

    • George Selgin

      adringuti, you apparently have me confused with Joe Stiglitz.

  • You are just like Stiglitz, Mankiw, Krugman, Sumner and Milton Friedman. All those men, like you, White and Horwitz, are unable to notice the way of looking at the essential and inherent unsoundness of fractional reserve banking. Perhaps this is due to the basic fact of not reading the books I mentioned are so crucial to understanding indifference curves cannot deduce properly the time preference of individuals. Your desire to believe in the statist dogma you earned your over-priced education from makes you fail to note a crucial rule of sound financial management—one that is observed everywhere except in the banking business. Namely, that the time structure of the firm’s assets should be no longer than the time structure of its liabilities. In short, suppose that a firm has a note of $1 million due to creditors next January 1, and $5 million due the following January 1. If it knows what is good for it, it will arrange to have assets of the same amount falling due on these dates or a bit earlier. That is, it will have $1 million coming due to it before or on January 1, and $5 million by the year following. Its time structure of assets is no longer, and preferably a bit shorter, than its liabilities coming due. But deposit banks do not and cannot observe this rule. On the contrary, its liabilities—its warehouse receipts—are due instantly, on demand, while its outstanding loans to debtors are inevitably available only after some time period, short or long as the case may be. A bank’s assets are always “longer” than its liabilities, which are instantaneous. Put another way, a bank is always inherently bankrupt, and would actually become so if its depositors all woke up to the fact that the money they believe to be available on demand is actually not there. The pyramiding process by frb banks upon its reserves do make banks appropriate forecasters of when and where customers will want their money. The problem does not lie with the quantity of money reserved, but that there be a fractioned reserve at all. Everywhere and at all times, frb will be pyramiding money, so as to build interest of course, but the inability to calculate human action forces this interest building to be a lottery game of swindling. It is inherently fraudulent. See Rothbard, The Mystery of Banking….seriously.

    • George Selgin

      Beyond a certain point, adringuti, a commentator can reveal such a lack of knowledge as to make it not worth one's time to read on. I think you reached that point in the first sentence of your last comment, and have been reinforcing it since. You imagine that I haven't read Rothbard's books, when in fact I was a hardcore Rothbardian myself, once; that I need to learn about praxeology; that I still consider myself an Austrian economist. You repeat some of the sillier arguments against FR banking pointlessly, as if I hadn't seen them and responded to them. In short, you are a perfect specimen of the sort of cloistered and devoted Rothbardian to whom my original remarks that started this exchange were intended to refer.

      • Let me ask you this george, how can you be considered any different than those other statists I mentioned if they believe in the same method of banking that you do? How can you claim to be any different than them if you do not support Ron Paul whom although a Rothbardian, still believes in ABCT? I bet you even support Rand Paul, which would be a stamp on the state loving file of swindling you claim to think is just if only the government removed the central bank. Rothbard's greatest argument was to believe in the power to quell booms and busts with 100% reserve banking, but was logical enough to understand that fractional reserve banking leads to the ratcheting effects of the state the very Robert Higgs is famous for pointing out. Competition in currencies would indeed lead to a more vast choice in banking methods, those of which Rothbard even suggested bailements could exist in a free society. Yet if one is to truly desire a society where booms and busts stop occurring with such frequency, and to remove the state from the free market process altogether, then a true Austrian would adamantly expose FRB for the danger it holds within its accounting processes. Perhaps your misunderstanding of FRB's harms is to think that expanding the money supply can be better done by individual banks, yet if this method of baking were to create such safe circumstances, then why is not ok to have a clearinghouse like the central bank pyramid on top of reserves as Free FRB banks would? Your analysis is consistently inconsistent, illogical and statist. Instead of being Rothbardian, you chose to be a Chicogoan-Ausrian, rhetorically pillorying big government, but in the end exacerbating its powers with the stupid economic tools Friedman felt could be controlled by all-seeing all-knowing banks and their calculations upon human action. If you still believed in praxeology, you'd quickly move towards using value scales to describe time preference and demand for money, yet you still prefer the MV = PT b.s. Rothbard in Chapters 4-6 rebuts and slams down any case for this equation using Mises' praxeology and value scales. Please be consistent, it seems you prefer statism Mr Selgin. The state has absorbed you into its inconsistent ways of being, just like Obama and Romney or even Rand Paul.

        • Milton Friedman didn't believe in the draft… Austro-libertarians didn't believe in the draft… dear God we're all statists now!

          • Friedman believed in FRB and positivism. Austro-Libertarians don't.

        • George Farnon

          @adringuti: Congratulations on proving Selgin's point

          • George Selgin


          • Selgin has proved Rothbard's point, that in a society with FRB banks would pyramid upon their reserves and fraudulently create money out of thin air. Read my earlier post on how FRB makes the time structure of the firm’s assets shorter than the time structure of its liabilities, this forces banks to be insolvent. Rothbard stressed this, Selgin dreams of mathematical jargon and unrealistic models and their ability to quell booms and busts. The government coercion of swindling has been due to the introduction of FRB, it is the tool the state uses to ratchet its powers. Read mor Rothbard.

  • Bear Nichols

    Professor Selgin,

    I would like to add my two cents, as invaluable as you may find them. I think the main issue when discussing fraud is that it's unrealistic to expect it to be overturned after so long a precedent, and it's not even clear that it would be considered fraud, because that depends on what both sides in the transaction know. Surely, many know what banks do with their money and even approve of it; just as surely, many have no idea. That would mean that in some cases it might be fraud (hard to prove, though) and others not, an impossible case to create a set law. That is a different question as to whether it should be fraud. You're arguing, of course, that it's not, and the current law agrees with you. Even if it were fraud, I see no reason under freedom of contract to disallow free banking or FRB. Also, in a free society, the courts would be free to decide this issue as well. There is no way to know which way they would turn. Over time, I assume competition would favor free banking. That would be completely in line with libertarian principles. In my personal experience, when I explain what banks do with people's money, people are shocked, but, ultimately, don't really care and aren't surprised. My audience was mostly in Europe, though. In the end, it should be the consumer who decides what banks are allowed to do. What do they prefer? I think they would prefer free banking to 100% reserve, but that's a guess.

    Anyways, I'd also like to say I don't care if you bash your opponents. It's just your style. Frankly, I'm sick of the pretenses on both sides of this argument and in academia in general. Grow a pair, I say. The insults are just window dressing. The meat is the most important. Besides, the chances that either argument when at this point are nil.

  • George Selgin

    Thanks for your remarks, Bear. Regarding fraud, I can't agree with your statement, "it's not even clear that it would be considered fraud, because that depends on what both sides in the transaction know. Surely, many know what banks do with their money and even approve of it; just as surely, many have no idea." Of course whether a contract is being violated or not isn't just a matter of what people know, for then mere ignorance–including ignorance due to failure to read the terms specified in the contract–would constitute sufficient grounds for a lawsuit or criminal complaint against a banker even if the banker acted acted according to the contract. So the debate about fraud boils down to one about what the terms of ordinary bank notes and deposits actually were, or (to come somewhat closer to your own position), what reasonable and responsible persons ought to have construed them to be (the last is more or less how the common law adjudicates). In my paper "Those Dishonest Goldsmiths," (forthcoming in the Financial History Review) I supply evidence of how, according to this perspective, fractional reserve banking has never been fraudulent, not even in early modern England when grounds for misunderstanding were presumably greater than ever since.

    • Bear Nichols

      Yes, that is how I meant it, and making that clearer would have been more prudent. By knowledge, I meant if they should have known given the available information. Of course, you have to remember that there has to be an intentional misrepresentation as well. Not reading a contract is clearly not grounds for complaint. There is always the old adage, "Ignorance is no excuse for the law."

      My only point was that even if we construe it as fraud, free courts would be at liberty to decide for themselves, and it is my suspicion that competition would lead them to free banking as well.

      And please excuse the vocab mistake. Invaluable was supposed to be unvaluable. Try typing with a baby running around.

    • People know what banks do with their money…..? WTF????!!!!! It was due to Ron Paul's insistence and stress of Rothbard's mechanics on the political stage that woke most of the world up to the dangers of "money out of thin air." It was never Selgin or Friedman that did this, Reagan inflated the hell out of money and ballooned the debt. As more and more people learn about the harms of FRB, also thanks to the Mises Institute, they are pressing more and more to end FRB and the Fed. Selgin you are nuts man. You even used the Mises Institute as a gateway towards espousing Mises' theories of praxeology. You got so far away from it and the essence of value scales, that you entered into the statist battle of using mathematical jargon and unrealistic models to take a crack at the positivist fight. You are no longer Austrian but statist my friend. Hayek's greatest flaw is what you are doing, but delve into positivism and not stick to the essentials of Austrian mechanics.

  • Why not having both type of issuers in the market – the condition would be for having different labels. "Certificates" (100% reserve notes and demand deposits) and "promises of payment" (fractional reserve titles).

    The fraud argument disappears if labels and contracts are clear – making them non-fungible by the way.

    The discussion now should be about would happen then?

    • Peter Surda

      While this might appease the FRB-is-fraud sentiments, it does not address the economic issues of FRB, which I personally think are more important. Whether an instrument is or is not accepted as a substitute for money is not decided by the issuer, but by the holders of these instruments. Unless economists understand what the motives behind this decision are, they won't be able to address it.

      • My personal opinion is that in this non-homogeneous and non-fungibles framework, contracts would have to specify if are to be settled in certificates or in promises of payment. An exchange market between both would set in. Not sure those known historical examples assure us that his clear set of contract types were in place. It seems to me that FRB is the one that benefits from its titles to be treated as fungible with 100 certificates -in this case,100% reserves would be offering superior service but at the same price.

        Many questions arise from this. Why would a physical gold holder deposit its physical gold in a fractional reserve issuer receiving a promise of payment title instead of deposit in a 100% reserve bank and in the case of lending it (time deposit) to the bank, I think he would specify that he wants to receive interest in form of further 100% reserve certificate and not interest in fractional reserve titles (some FRB arguments says that people want to received interest. Ok. But if someone lends real physical gold why would he prefer in the maturity to receive a FRB title instead of its original gold plus interest – in the form of 100% certificate)?

        What I am arguing is that discussion should analyse what would happen in a open market situation with legal

        • Peter Surda

          I agree with you that the economists should concentrate on the question of what would happen on a free market where FRB is permitted.

          My own argument is that if there are money substitutes, they will tend to be based on fractional reserves (i.e. so far my position seems to correspond to that of Selgin and in particular White). I argue that there are costs associated with money substitutes (maintenance of reserves, redemption facilities), and these need to be shifted over to the users. With full reserves, the only way to do this is to charge the users, e.g. via transaction or deposit fees. With fractional reserves, these costs can be offset by externalising them through reduced purchasing power. Even though some full reservists might find this disturbing, from the point of view of an individual I argue that the FRB option is cheaper. So unless FRB is banned all over the world, people would tend to use FRB instruments issued in jurisdictions where it is permitted.

          A possible solution, one that I recommend, is to have monetary base that has so low transaction costs that money substitutes do not emerge. An example of what it could look like is Bitcoin.

          These two answer your question why people deposit money in fractional reserve banks:
          – the money substitutes they get have lower transaction costs than money proper
          – the costs associated with holding a fractional reserve instrument are lower than the costs associated with holding a full reserve instrument

          Furthermore, even full reserves are no guarantee that the issuer of the debt instrument will be able to refund anything. The plethora of failures by various Bitcoin-denominated account operators is a great proof of that.

          • "I agree with you that the economists should concentrate on the question of what would happen on a free market where FRB is permitted."

            Permitted and clearly labeled. From general accounting rules of prudence, different contracts must be booked balances, as today for different currencies anyway.

            So balances would show:

            – certificates of 1000 grams of gold issued by bank/warehouse A
            – titles of promises of payment of 1000 grams of gold issued by bank B
            Market forces would set in, and both titles would be in use, but prices and contracts including debt contracts would have to specify the settlement rules (what kind of titles, issuers, etc.).

            This sould be the starting point for the discussion, and I have to say that as much as I like the FRB arguments, seems to me that Gresham Law would revert. better money would drive less money away. But anyway, both would be able to compete.

            About interest:

            It is not disputable, or so I think, that with a gold standard (a stable supply of money) and economic growth, a benign deflation sets in, and so any fees for warehousing probably would be paid nominally by the healthy deflation itself.
            In fact, that is one of the arguments why gold would be good for not sophisticated persons. They could save by hoarding making them independent form banks and complex products and free of credit risk. Low income people with a saving preference would gain by a gold standard.

          • Peter Surda

            On gold standard with FRB, you'd still have credit expansion and as a consequence thereof the business cycle.

            While I agree that it should be clear to the depositor whether this is a full reserve deposit or a fractional reserve one, I don't think that the redemption risk following from this would affect their decision significantly (full reserve deposits also have this risk, even though it might be lower). However as I said, I expect the full reserve one would be more expensive, so therefore less preferred, as long as there is sufficient demand for substitute media of exchange.

  • " I expect the full reserve one would be more expensive, so therefore less preferred, as long as there is sufficient demand for substitute media of exchange."

    Not sure about that.

    You are not comparing the same kind of titles.

    Benign deflation would offset warehouse costs for 100% certificates, and I am not sure if a discount would set in FRB. Please be aware that interest in FRB balances would be payable in more FRB. Do you see what that means?

    Is it possible or not that a discount would set in? What would be the preference for debt contracts – to lend 100% certificates and received FRB interest and FRB titles at maturity? Does it makes sense? It makes sense if I am lending already FRB claims.

    But in the end, someone is in the posession of physical gold(or certificates of warehouses). Would these ones lend it and gladly receive FRB demand deposits?

    • Peter Surda

      The issue here is that the costs of maintenance of the subsitutes (e.g. storage, authenticating redemption etc) need to be borne by someone. If you use full reserves, you need to charge the users directly (e.g. via storage fees or transaction fees). With fractional reserves, you can externalise the costs in the reduced purchasing power. For an individual user, the direct fees are higher than the reduced power as that is spread among everyone. So they would tend to choose fractional reserves. Full reserve instruments cannot be even implemented correctly with all types of media. e.g. if a banknote is lost, what happens with the gold in reserve? I don't think full reserve substitutes can compete with fractional reserve ones.

      • Well, sure those are valid arguments and should be the ones being discussed. My feeling is that not all in the FRB camp is ready to accept that both titles should be on the market but as different currencies making mandatory to book it in different accounting balances and where contracts would have to specify which one (or both – and which issuer) would settled the contract or clear a price (of any pruchase). This should be the starting point.

        • Peter Surda

          I think that the anti-FRB branch overemphasises the difference on the wrong aspects, and believes that people are somehow magically FRB averse, if only they knew what's happening and if they were permitted to accept them at market ratios rather than fixed ones. While it is possible that many if not most people do not understand it and educating them is a noble goal, it's an entirely different thing to assume that they would care even if they knew. My analysis, which I briefly outlayed earlier, leads me to the conclusion they probably wouldn't.

  • "With fractional reserves, you can externalise the costs in the reduced purchasing power"

    The other side of the coin is why would gold physical actual owners exchange physical with claims with reduced purchasing power?

    The reason people do "not understand" is precisely because of the apparent homogeneity as fungibles money substitutes. in that case, "bad" money will driva "good" money away, I agree.