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Source link: http://archive.mises.org/11433/free-banking-versus-large-scale-credit-expansion/

Free Banking versus Large-scale Credit Expansion

January 12, 2010 by

Government interference with banking is based on the erroneous assumption that credit expansion is a proper means of lowering the rate of interest permanently and without harm to anybody but the callous capitalists. FULL ARTICLE by Ludwig von Mises


Guard January 12, 2010 at 7:32 am

“Under free banking, a cartel of the banks would destroy the country’s whole banking system. It would not serve the interests of any bank.”
But banks don’t have interests, only people do. It would be entirely within the interests of bank officers to loot the system with a cartel and then retire comfortably in Bali.
I notice often that the projection of personality onto an organization is carried far beyond a possibly useful metaphor and into the realm of delusion. We cannot assume “banks” would act rationally, let alone in their own interests.

fundamentalist January 12, 2010 at 9:46 am

Free banking should include the possibility of buying insurance on deposits from a third party, but not the guv. It would work far better than FDIC insurance because it would reduce risk taking by banks in their lending. Private insurance companies would become de facto bank regulators.

DD January 12, 2010 at 10:28 am


Business uncertainty is not insurable. Only risks associated with event probabilities that are subject to the laws of natural science.

The uncertainty of entrepreneurship cannot be classified as what Mises termed “Class probability”, but “Case probability”. Only events that can be categorized under Class probability can be insurable.

Martin Sibileau January 12, 2010 at 10:36 am

Guys, focus on aggregate leverage. Financial crisis arise because leverage, on aggregate, can exist. A system that would not allow aggregate leverage is the solution, perhaps the only solution, to financial crisis. I am not saying individual A or firm X should not have leverage. I am saying that if they do, there has to be a counterparty saving for them, so that on aggregate, leverage is zero.

Free banking systems, per se, do not solve the problem. The key is in the structure free banking systems adopt. Mises’ suggestion for a convertible agency, in my view, was wrong. You can still have financial crisis under convertibility. If you disagree, I can provide the example of Argentina in 2001.

Mike Sproul January 12, 2010 at 11:51 am

So what if banks cause a large scale credit expansion? As long as those banks’ assets rise in step with their issue of credit, the value of the money they issue will be unaffected.

billwald January 12, 2010 at 2:36 pm

“But banks don’t have interests, only people do.”

Unfortunately, per the Supreme Court corporations are persons.

“Business uncertainty is not insurable.”

Anything is insurable if someone wants to take the bet.

DD January 12, 2010 at 2:52 pm

Billwald: “Anything is insurable if someone wants to take the bet.”

And this is suppose to be based on some common sense “wisdom” or actual actuarial science?.

Gernot Hassenpflug January 12, 2010 at 10:57 pm

I cannot make head or tail of this sentence, although all the other parts of the article were not too difficult to follow:

“Since the over-issuance of fiduciary media on the part of one bank /../ increases the amount to be paid by the expanding bank’s clients to other people, it increases concomitantly the demand for the redemption of its money-substitutes.”

Can someone explain who is paying who here, and who wants to redeem the over-issued notes?

Many thanks,
Gernot Hassenpflug

Carlos Novais January 13, 2010 at 4:11 am

Gernot Hassenpflug

An example i gave in the post “The Legitimacy of Loan Maturity Mismatching: Bagus & Howden vs. Barnett & Block”:

“A History of Money and Banking in the United States”, Murray N. Rothbard, pp 78-79:

“One effective, if timeconsuming, method of enforcing redemption on nominally specie-paying banks was the emergence of a class of professional
“money brokers.” These brokers would buy up a mass of depreciated notes of nominally specie-paying banks, and then travel to the home office of the bank to demand redemption in specie. Merchants, money brokers, bankers, and the general public were aided in evaluating the various state bank notes by the development of monthly journals known as “bank note detectors.” These “detectors” were published by money brokers
and periodically evaluated the market rate of various bank notes in relation to specie.47

During the panic of 1819, when banks
collapsed after an inflationary boom lasting until 1817, obstacles and intimidation were often the lot of those who attempted to press the banks to fulfill their contractual obligation to pay inspecie.
” Yet two days after this seemingly tough action, it passed another law relieving banks of any obligation to redeem notes held by money brokers,
“the major force ensuring the people of this state from the evil arising from the demands made on the banks of this state for gold and silver by brokers.” Pennsylvania followed suit a month later. In this way, these states could claim to maintain the virtue
of enforcing contract and property rights while moving to prevent the most effective method of ensuring such enforcement.”

mikey January 13, 2010 at 3:51 pm

DD, actuaries evaluate risk for insurance companies
using tables drawn from past experience.
This I can understand. However some actuaries purport to evaluate risk associated with investments,
for pension funds for example.I do not know how they can make this claim. Can you shed any light on this?

Also, suppose I work for a large publicly traded company. If I am worried about a downturn in this
companies fortunes (and thus my job) I buy out-of-the-money put options on my own employer.
Could this not be considered a form of insurance?

Gernot Hassenpflug January 14, 2010 at 9:39 am

@Carlos Novais: thank you very much for the explanation, makes it clear to me. Much appreciated!

Gerry Flaychy January 17, 2010 at 6:02 pm

To Gernot Hassenpflug.
“Since the over-issuance of fiduciary media on the part of one bank /../ increases the amount to be paid by the expanding bank’s clients to other people, it increases concomitantly the demand for the redemption of its money-substitutes.”

” Can someone explain who is paying who here, and who wants to redeem the over-issued notes? “_Gernot Hassenpflug

The fiduciary media are issued to borrowers, who then use it in market transactions. Some of the people in the market who are paid with those fiduciary media then go to the issuing bank to redeem them. More fiduciary media issued, means more of them have the possibility to return to the issuing bank to be redeemed.

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