http://mises.org/journals/jls/18_3/18_3_3.pdf

http://www.scribd.com/doc/12808637/Fractional-Reserve-Banking-as-Economic-Parasitism-by-Vladimir-Z-Nuri

http://www.jeffvail.net/2009/02/fractional-reserve-banking-and-growth.html

http://www.accessmylibrary.com/coms2/summary_0286-2737288_ITM

The practice of Fractional Reserve Banking has had a contentious history and although some consider the practice free of negative ethical or legal defects, others strongly disagree, arguing that it is both immoral and destructive of the economic and social order.

Some civilizations have outlawed the practice in the past and even executed its pracititioners, considering the practice a violation of property rights (akin to embezzlement).

Modern societies do not currently consider bankers worthy of summary execution, and no modern economy currently outlaws the practice.

Call me strange.

Maybe the Romans were simply wrong about FRB! Your “logic” amounts to begging the question.

By analogy, you must think charging interest has legal and ethical defects:

“If charging interest has no legal or ethical defects, why did a major civilization criminalize the practice for centuries?”

Identifying logical fallacies is evidently not a strength of yours.

(2) The Roman Empire lasted a few years longer than the current crumbling American “Paper House of Cards” Empire.

At least the Romans slyly swapped silver for debased copper, which gave them a few more years before the monetary system finally imploded.

The US went from gold straight to worthless paper on August 15, 1971, signaling a kind of accelerated mass monetary suicide.

Sorry to be so brutally explicit, but it looks like you needed some help following the logic.

Picking up subtle implications from simple statements is evidently not a strength of yours.

The Ancient Romans didn’t agree, consistently outlawing the practice as an immoral violation of property rights.

But then again, what would they know. The barbarians.

to the extent that banks mirror each other and grow their loan books at a similar pace, the cycle will be bigger that it otherwise would be, and the past data will be of no use in determining adequate reserves.

regarding inflation, i’m taking it to mean the increase in the supply of money, not whether this has any effect on prices. (as you say, increased desire to hold money can offset to a certain extent the increased supply). money supply is at least more tractable than money demand (about which nothing can be said, except it may be between 0 and 100%). anyway, in modern history supply has increased so dramatically it’s arguably the dominant factor, except for brief interludes (like now).

I have been asked: “Do you think that FRB is free of legal/ethical defects?”

YES, it has no legal or ethical defects. Again, please see the long discussion in this thread: http://blog.mises.org/archives/009973.asp. George and Larry make the case.

No fudging, no hedging, no hesitation. FRB is neither legally nor ethically problematic. Period. End of sentence.

And for Newson: free bankers don’t have to predict a bank run. All they need to do is watching their flows of reserves/clearings, having learned from experience what level of reserves keeps them safe, to see whether their reserves fall below that level. At that point, they know they have overissued relative to demand. This is called entrepreneurship, no different from the judgment exercised by all kinds of businesspeople in all kinds of businesses.

“Growing their loan books” is NOT in and of itself inflationary. Growing their loans (investment funds) beyond the public’s demand to hold their liabilities (savings) is what is inflationary.

http://johnquiggin.com/index.php/archives/2009/05/21/banks-should-be-public-utilities/

The “y” key is on the top row (around the middle). The “e” key is also on the top row (to the left). The “s” key is in the middle row (near the “e” key).

Do you think that FRB is free of legal/ethical defects?

“The interest rate is driven down due to false signals sent by the creation of capital that was not saved into existence but was created by the fractional reserve process.”

No, it isn’t necessarily FRB that’s the problem. See below.

“The eroneous signal is not caused by the interest rate, the false signal is caused by the creation of money that is indistiguishable from genuine capital.”

Of course. I didn’t say anything different from that. The erroneous signal isn’t CAUSED by the interest rate, it IS the interest rate, which is sending a bad signal because the inflation makes it appear as though savings has taken place when in fact it hasn’t. You and I have no disagreement here.

“This false capital is the product of the fractional reserve process and is the mechanism that leads to lower interest rates. The FRB created capital is indistinguishable from capital brought about by deferred consumption, giving the appearance of an excess of savings – supply of capital – which drives down the price of capital – the interest rate. You have the process backwards.”

No, I don’t think I do. I’m pretty sure I know ABCT pretty well, as a couple of books and all kinds of articles on it might attest to.

The problem here is that YOU are assuming that FRB is the problem when the problem is NOT inherent in FRB but rather a product of a supply of money greater than the public wishes to hold at the current price level. As long as the public is willing to hold bank liabilities, it is supplying the requisite saving to the banking system and the multiple loans the bank creates are not inflationary.

My holding of bank liabilities is “deferred consumption” which thereby supplies real savings to the banking system, yes, even under FRB. This is the argument of Selgin’s book and it is developed in more depth in my own 2000 book.

FRB is not the problem, inflation is. It is the excess supply of money that forces the market rate below the natural rate, which is the result of the forced savings created by the inflation. That forced savings makes it LOOK LIKE there’s more savings when in fact there is not. Consumption has not been deferred, even though the interest rate makes it seem that way. The lower interest rate is a false signal about people’s real consumption/savings tradeoffs and thus generates the malinvestment in the stages of production farther away from consumption that characterize the cycle.

FRB does not inherently cause inflation, therefore is does not inherently cause distorted interest rates, therefore it does not inherently cause malinvestment and the Austrian cycle. It CAN do all of this when it’s combined with central banking or bad regulations, but it need not.

In the environment of free banking with fractional reserves, increases in the public’s willingness to hold money balances supplies real savings to the banking system which gets translated into investment in a sustainable capital structure. When central banks intervene, they over-produce money without a real demand to hold by the public, which results in the cycle.

FRB isn’t the issue. The absence of markets is.