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Source link: http://archive.mises.org/14444/economic-recessions-banking-reform-and-the-future-of-capitalism/

Economic Recessions, Banking Reform, and the Future of Capitalism

November 1, 2010 by

If we wish to culminate the fall of the Berlin wall and get rid of the real socialism that still remains in the monetary and credit sector, a priority would be the elimination of central banks, which would be rendered unnecessary as lenders of last resort if a 100 percent reserve reform were introduced. FULL ARTICLE by Jesús Huerta de Soto


Adam November 1, 2010 at 11:11 am

I had the pleasure of attending this lecture. It was great to see someone stand in front of a room full of mainstream economists and call for 100% bank reserves, an end to central banking, and a return to the gold standard.

DavidNcl November 2, 2010 at 12:28 pm

Did you once live in Rothbardy terrace?

Allen Weingarten November 1, 2010 at 11:31 am

“100 percent reserve banking is the only system compatible with the general principles of the law of property rights.”

It seems evident to me that this is the same as having one IOU for a car, in contrast to perhaps a 20% reserve banking that could give out 5 IOUs for one car.

John B November 1, 2010 at 12:23 pm

Congratulations to Professor Huerta de Soto for this magnificent presentation.
Unfortunately his words:
” . . . the tangle of vested interests related to the current privileged fractional-reserve-banking system . . ”
are possibly only too true and the people and influences he refers to will sabotage any attempt to restore sanity to the global economic situation.

However it is truly heartening to see the presentation of a rational and common sense solution to the awful mess that ideological madness and stupidity have led us into.
God bless you sir, indeed, and may the “powers-that-be” take note of your words.

Jonathan M. F. Catalán November 1, 2010 at 12:49 pm

Has anybody heard of the possibility of a two-volume general treatise on Austrian theory by Jesús Huerta de Soto? A fellow Spanish economist posted something to this end on my blog, and I am trying to find some more information.

ElwoodPDowd November 1, 2010 at 1:48 pm

“They had also realized that, from a legal standpoint, neglecting to maintain a
100 percent reserve on demand deposits is a mortal sin and a crime – not of
forgery, as is the case with the overissue of banknotes, but of
Misappropriation, such a pleasant and mild term, I much prefer harsher and
clearer terms like stealing or theft, but still he says beautifully what needs
to be said.
One small point I would like to make though, why is there no mention of the
‘incentive’ for the bankers themselves to engage in FRB? He points out why
entrepreneurs like the process of FRB : ” To begin with, entrepreneurs are
usually very happy with expansions of credit, because they make it seem as if
any investment project, no matter how crazy it would appear in other situations,
could easily get financing at very low interest rates.” He also refers to a
general pleasure for everyone in the results of FRB : “Everyone is happy,
especially because it appears it would be possible to increase one’s wealth very
easily without any sacrifice in the form of prior saving and honest, hard,
individual work.” Where does he point out that the bankers themselves enjoy FRB
precisely because it is outrageously more ‘profitable’ than honest banking?
“Furthermore, as we have seen, the whole financial system is based on the
legal privilege given by the state to private bankers,…” This line should be
emphasized and expanded on. FRB is a system of privilige granted by the state
and is only sustainable as a priviliged activity engaged in by a special class
of financial aristocracy. If one considers the consequences of everyone being
allowed to engage in the practises that make up FRB, it becomes crystal clear
that FRB is only sustainable if it is illegal for most of us to participate in
it other than as victims.
Yours Truly, the heretic and poor lost soul,
Sy Akhplart

A Liberal In Lakeview November 1, 2010 at 2:01 pm

Anyone interested in the FRS’s understanding of fractional reserve banking may find it worthwhile to read Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion, first published in May 1961 and revised numerous times thereafter.

The edition I have cites the FRB of Chicago as its source and was distributed in Feb. 1994. Thus it is a little out of date. Still, the basic principles at work in banking today are examined in this relatively short work.

Modern Money Mechanicsexplains in detail what happens in the case of some of the actions listed below in addition to showing the effect on FR banks’ balance sheets for all such actions. For example, when an FR bank purchases government securities, do bank reserves increase or decrease? The answer, complete with explanation that includes T-accounts for both FR banks and other banks, is provided.

The workbook also helps to clarify the reader’s thinking about deposit contraction and, in the case of both expansion and contraction, makes claims about the theoretical limits while mentioning how results short of those limits would be experienced in practice. It will take, as I’ve discovered, considerable force of will to get through it even though it’s just 40pp.

Anyone interested in obtaining a copy, in PDF, should send me a request at lakeview.paul@gmail.com.


Factors Changing Reserve Balances-lndependent and Policy Actions

Public actions
lncrease in currency holdings …………………………
Decrease in currency holdings ……………………….

Treasury, bank, and foreign actions
Increase in Treasury deposits in F.R. Banks …………….
Decrease in Treasury deposits in F.R. Banks ……………
Gold purchases (inflow) or increase in official valuation* ……………….
Gold sales (outflow)* ……………………………..
Increase in SDR certificates issued* …………………
Decrease in SDR certificates issued* ………………..
Increase in Treasury currency outstanding* ………..
Decrease in Treasury currency outstanding* …………….
Increase in Treasury cash holdings* ……………………..
Decrease in Treasury cash holdings* ………………..
increase in service-related balances/adjustments ………….
Decrease in service-related balances/adjustments ………………
Increase in foreign and other deposits in F.R. Banks …………..
Decrease in foreign and other deposits in F.R. Banks ………

Federal Reserve actions
Purchases of Securities………………..
Sales of Securities…………..
Loans to Depository Institutions…………..
Repayment of Loans to Depository Institutions…………….
Increase in Federal Reserve float ……………………….
Decrease in Federal Reserve float ……………………….
lncrease in assets denominated in foreign currencies ……
Decrease in assets denominated in foreign currencies ……..
increase in other assets** ………………………………
Decrease in other assets** …………………………
Increase in other liabilities** ………………………
Decrease in other liabilities** ……………………..
Increase in capital accounts** ……………………..
Decrease in capital accounts** …………………….

Increase in reserve requirements…………………
Decrease in reserve requirements…………………

“Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value.”

maruta November 1, 2010 at 5:20 pm

Who’s the author??

Revert cause and effect.

maruta November 1, 2010 at 5:22 pm

Name the author! You revert cause and effect.

maruta November 1, 2010 at 5:31 pm

Who’s the author??
Revert cause and effect.
No, the metal is more valuable than the face value of the coin.

Juraj November 1, 2010 at 3:31 pm
Richard November 1, 2010 at 3:57 pm

Good to see John Redwood MP giving the lecture a mention: http://www.johnredwoodsdiary.com/2010/11/01/de-soto-austrians-keynsians-and-bankers

His blog is read by a lot of people with free market sympathies who may be unfamiliar with the Austrian School.

greg November 1, 2010 at 4:06 pm

Fractional Reserve Banking is part of the cause of business cycles, but not all of it. 1844 sticks in my mind as a date which the Industrial Revolution was gaining steam (sorry about the pun). From that date to the present, productivity has grown several thousand times and that high level of growth contributes to periodic adjustments in the economy. If you pull up a graph of recessions in the US, you will see about a one to one ratio between boom and bust periods until after WWII where you see about a 4 to 1 ratio of booms to bust.

Our current economic problems was not entirely caused by changes in the money supply. As I see it, other causes were:

1. The expansion of commodity ETF’s led to overspeculation in oil and other commodities. When oil hit $130, the construction industry came to a halt.

2. The high cost of payroll taxes and heathcare led to the expansion of contract labor in the banking industry. Bankers not seeing the total picture were easily manulated by mortgage brokers.

3. In many industries, middle managers have been replaced by people that their only skill is processing orders that the computer tells them to do.

4. Unemployment insurance has developed a new work force that works for cash and collects benefits.

5. The media and the 24 hour news programs get people to make stupid decisions. Why would anybody in their right mind sell securities when the Dow dipped below 6600? It was the sensational reporting!

6. Falling interest rates and falling prices have kept buyers on the sidelines. The truth they don’t know is that only 1% of them will actually catch the bottom.

7. And this recession being called the “Great Recession”, I just don’t see it. The high inflation and high interest rates of the late 1970′s was much worse. The unemployed that I know still have the landscape service mowing their yards.

The point I am trying to make is that you are always going to have business cycles and you will have many and different causes. Learn to read the economic road signs and you can profit from it.

ElwoodPDowd November 1, 2010 at 4:33 pm

Wow, complete ignorance of ABCT and a focus on surface events, most of which
exist as a direct consequence of FRB, the rest being irrelevant. Look only at
symptoms, never look at causes, what wisdom!
Yours Truly, the heretic and poor lost soul, Sy Akhplart

maruta November 1, 2010 at 5:18 pm

Revert cause and effect.

Ohhh Henry November 1, 2010 at 6:45 pm

This error of Peel’s bank act, or rather, of most economists of that period, who were ignorant of something already discovered much earlier by the Spanish Scholastics, proved to be a fatal error: after 1844 bankers did continue to keep fractional reserves, not on banknotes of course, because it was forbidden by the Bank Charter Act, but on demand deposits. In other words, banks redirected their activity from the business of overissuing banknotes to that of issuing demand deposits not backed by a 100 percent reserve, which from an economic point of view is exactly the same business.

I doubt very much that it was an error or oversight, but more likely was the deliberate construction of a loophole at the bankers’ behest. Do not underestimate the strength of the circle of corruption between bankers and politicians. Politicians need to borrow money for self-aggrandizing wars and to buy elections, bankers need protection for their counterfeiting operations. It is not a question of whether this person has read the Scholastics or that person understands the legal intricacies of bank deposits – the only question is whether someone has coercive power over the populace, and if they do then you can debate all you want however somebody is going to get the shaft and somebody is going to get rich. It is not the knowledge that matters but the power.

This simple equation of power vs. the people is even more clear when you step back from the banking debate of the 19th Century and look at what else was happening in Britain. If you institute a fiat money system as Robert Peel did, then how do you force people to accept the counterfeit money, and the economic hardship that is the inevitable result? You need a standing army for sure, but for every day suppression of small-scale economic crimes (the large scale crimes are of course legalized) and to clean up the human detritus left over from financial panics and depressions, it is vital to keep a large, well-trained and vigilant force on the streets ready to quell troublemakers at a moment’s notice. This was the other main gift to the British people for which Sir Robert Peel is remembered – the creation of “Peelers” or “Bobbies”.

guard November 2, 2010 at 4:55 am

Right on Henry. The issue is power, not ignorance, not stupidity. I think part of what prevents the general populace from acknowledging this is pride. Who wants to admit that they are an impotent and expendable slave? The conclusion will become less avoidable as the police state apparatus grows in this country.

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