In previous posts I’ve mentioned the UK banking reform ideas spearheaded by UK MPs Douglas Carswell and Steve Baker with the support of Cobden Center founder and entrepreneur Toby Baxendale (see links at the end of this post). Baxendale sent me the following for posting here for discussion and commentary here on the Mises Blog, and also asked Steve Horwitz to post it on Coordination Problem (it’s up there at Another Banking Proposal from Toby Baxendale):
Come the Revolution, in a free banking world, where there is at least no lender of last resort, commodity backed money with no possibility of over issuing above that commodity in reserve and no deposit insurance, it would be possible for safe deposit accounts and savings accounts where money is lent to borrowers to exist. Both 100% Reserve Free Bankers and Fractional Reserve Free Bankers would be happy thus far. If an instant access demand deposit is offered that is fractional in nature, we get heated debate within the free banking community; the arguments will be familiar to readers of this site. So I am going to throw in a left field ball and see what comes out in debate about what I see as a potential solution to this. I will remain silent on the thread until all comments are in.
The Third Type of Account (not named yet, will not use 100% or Fractional in the title due to fear of the verbal abuse that will come forth!)
Consider this, a depositor goes into his bank, he is offered a safe deposit account that is safe, but gives no interest, his time preference is such that he wants to earn some interest. The bank worker shows him to his colleague who offers him a savings account. Our depositor loves the rate of interest offered, but notes that he has to put his money away for at least a month, 3,6,9 18 months X number of years to get a proceedingly better rate of interest. This does not satisfy our depositor as he wants to have instant access and interest. He wants to have his cake and eat it. He gets taken to see the Third Type of Account manager. This manager says this account is a timed deposit account in nature i.e. your money is locked away for at least a month, 3,6,9 18 months X number of years, but the bank will allow instant access , by exception for the liquidity that it keeps in reserve all the time. However, should there be too much call on liquidity, the bank reserves the right to point out that you the depositor are actually a de jure timed depositor / creditor to the bank for at least a month, 3,6,9 18 months X number of years and are going to he held to the time period you freely signed up to.
This third type of account always allows the bank to be reliant on no legal privilege and no accounting standard that is different to other commercial organisation to keep its current and long term creditors whole at all points in time as the creditor in question is in fact a timed depositor who has instant liquidity by exception and not by demand. The reality is this liquidity would be almost at all times there bar the period of bank runs. In fact dare I say it, I can feel the avalanche of invective building up already, that this is a robust 100% reserve type account form an accounting an legal point of view, with all the benefits of a fractional reserve account of instant access, with non of the inflationary business cycle inducing consequences hotly alleged by the 100% Reserve Bankers.
For further background, see my posts Cobden Centre Radio: Steve Baker MP on Austrian Economics and Banking Reform; Freebankers Debate Baxendale Banking Reform Proposal; UK Parliament Speech Invokes Mises Institute re Honest Money and Sound Banking and UK Proposal for Banking Reform: Fractional-Reserve Banking versus Deposits and Loan. Regarding Huerta de Soto’s LSE Hayek speech which discusses these issues and mentions the Carwell bill, see Jesús Huerta de Soto’s LSE Hayek Lecture on Banking Reform; Jeff Tucker’s Yesterday was a Historic Day; Lew Rockwell’s LRC post Jesús Huerta de Soto in London.
{ 72 comments }
“The reality is this liquidity would be almost at all times there bar the period of bank runs. ”
I have to give Baxendale credit for at least acknowledging the possibility of non-fraudulent fractional reserve banking. But the first thing that anyone should understand about bank runs is that they are not caused by illiquidity, but by insolvency. A solvent bank, by definition, has enough assets to buy back all the money it has issued. So not only do the customers of such a bank have no incentive to run, but even if they did the bank could handle the run.
An insolvent bank, on the other hand, will face a run no matter how liquid it is. If a bank’s assets are 1% short of the amount of money it has issued, then of course no customer wants to be last in line, so a run happens, even if all the bank’s assets had been liquid.
I suppose someone will object that bank runs can result from maturity mis-matching, where the bank could have met all its obligations if only it had 30 days to liquidate its assets, but of course if the bank’s assets are payable in 30 days, while its liabilities are due now, then if the present value of those assets is less than the liabilities, that bank is insolvent.
I disagree with you about a lot of things Mike, but I agree with everything you’ve said here.
Funny how so many people think the fraud of FRB lies solely in what the bank
says and has nothing to do with their actions.
“This manager says this account is a timed deposit account in nature i.e.
your money is locked away for at least a month, 3,6,9 18 months X number of
years, but the bank will allow instant access , by exception for the liquidity
that it keeps in reserve all the time. However, should there be too much call on
liquidity, the bank reserves the right to point out that you the depositor are
actually a de jure timed depositor / creditor to the bank for at least a month,
3,6,9 18 months X number of years and are going to he held to the time period
you freely signed up to.”
What is this liquidity referred to and what do you mean by keeping it in
reserve? A bank is certainly free to use its own money as it sees fit, if they
want to provide access to their own money for the convenience of customers who
have a time deposit, that is their right, and they can provide this service for
a fee or do it gratis as they see fit.
However, if this access is funded, not by actual money that belongs to the
bank, but instead, through bookkeeping entries consistent with FRB practises,
then this is no advancement at all. It is the exact same practise we face now,
just dressed up with different rhetoric.
If the pro-FRBie position, that there is no fraud, or any other misdeeds
involved in FRB is correct, why are banks the only ones who are allowed to do
it? If there is nothing wrong with making a scarce economic good available to
multiple parties at the same time, why can’t everyone do it? Why only banks?
As that, oh so clever fellow, perfesser Selgin loves to point out, the banks
make it clear that the only relationship between them and their customers is
that of creditor and debtor, nothing else. Curiously, in common parlance the one
borrowing the money is usually called the customer, not the other way around. I
guess that makes the bank my customer when I deposit money in my account. Why is
it illegal for me to treat my ‘customers’ the same way the bank treats its
‘customers’?
It is a commonly accepted point of law in free countries that if an activity
is legal, then it is legal for everyone, not just for the cronies of the powers
that be. Lets take a look at FRB from the idea that these activities should be
open to everyone, after all, they are harmless, if not outright beneficial to
society.
I notice that I can get a checking account that pays a small rate of
interest, 1% on the one I am looking at. I take this $100 bill I have here, in
front of me, to the bank and open an account. Then, because there is nothing at
all wrong with telling someone else that they also have access to that same
money, I go to a second bank. At bank 2 I open an account by writing a check for
$100 on the first account. Then I go to a third bank and write a check on bank 2
for $100 and open another account. I follow this pattern until the one hundredth
bank, at which point I write a check on that bank for $100 and send it to the
very first bank. I now have 100 accounts, each with $100, assets and liabilities
balance. I have done nothing wrong according to FRB.
Following the methods described so eloquently by the pro-FRBies, I use my
right to temporarily delay transfer of funds in what is, after all, just a loan,
to make sure that all of the checks clear in order and in rapid succession. This
is called good banking practices. The original $100 circulates through the
accounts, cascading from one to the next like the water in M. C. Escher’s
wonderful drawing of those waterfalls.
By continuing this pattern of check writing in a timely manner, accounting
for the time involved in clearing transactions, I can keep every account
continually at $100. The banks, my customers, are not hurt in any way, because
they each have the use of the original $100 in exactly the same way that THEIR
customers have the use of any other depositors money under FRB. They turn around
and loan out the money from my accounts, at higher interest than they are paying
me, to multiple customers just as I have done with them. Prosperity flows from
my actions like water from a holy spring.
At the end of one year each account has earned $1 in interest. A total
return of $100 on an original investment of $100 , not bad at all. Resisting the
temptation to take my honestly earned profits to Ms. Bunny”s Sartorial Parlor
and Club for Gentlemen, I instead gather up all the interest and add it to the
first $100 in bank number one. I continue as before, but now I am writing checks
for $200. At the end of the second year I have honestly earned $200 in interest,
which I add to the first account once again, doubling my wealth once again.
Still resisting the charms of Ms. Bunny, I follow this pattern for 15 years, at
which point every account balance reads $1,638,000. If you doubt it, do the
math, $100 doubled 15 times. Think of the prosperity I have brought to all of
those bankers.
But alas, I can no longer resist the pleasures of Ms. Bunny”s Sartorial
Parlor and Club for Gentlemen, so I allow the checks to clear one last time, in
order, and write no more, one at a time I close the accounts, in reverse order,
until I get back to the original account. The original account which holds only
my original $100 and all of the honestly earned interest over the 15 year
period. The original account which now has $1,638,000 none of which was stolen
from anybody according to the tenets of FRB. It seems Ms. Bunny and I will have
a fine time indeed.
Imagine now, if you will, everyone in the world following the tenets of FRB,
as is their right in a free society. Why, in a single generation poverty would
be erased, all mankind would be so wealthy that no one need ever work again. We
would all, each and every one, bask in luxury and ease. Does it sound a little
too good to be true?
This is the nub of the issue, the very heart of the fraud that is FRB. If
every person were allowed to engage in the practises that make up FRB, the
entire system would collapse. If every person were free to create credit money
according to the tenets of FRB our banking system and monetary system would
obviously collapse, we would be reduced to a barter economy. Those who practise
FRB are like the burglar who complains when he is robbed, they insist that only
they should have this particular license to steal. FRB is sustainable only if
its practises are restricted to a lucky few, it requires that others be
prevented by law from doing the exact same thing. Governments are only too happy
to oblige their owners in the banking industry. After all, what is a government
if not a gang claiming the exclusive right to steal and murder?
I am truly amazed at the individuals who claim that FRB would never arise in
a free market, one of them even said “there would be no incentive to engage in
FRB”. FRB is wildly profitable up to the point that it fails, much more
profitable than honest banking has ever been. Typically, when it does fail, the
executives who rewarded themselves with outrageous salaries and the stockholders
who received outrageous dividends, get to keep that money. It is the depositors
who lose out. The adage “crime doesn’t pay” holds true only so long as a society
actually makes the activity criminal. Saying that FRB would disappear solely
from the competition of honest banks is the same as saying that armed robbery
would disappear solely from the competition of honest labor, no need to make it
illegal.
If you truly believe that FRB is honest and legal, then you should support
the right of every individual in a free society to engage in these activities.
Imagine, every single one of us free to engage in FRB….
Yours Truly, the heretic and poor lost soul, Sy Akhplart
Elwood:
“I now have 100 accounts, each with $100, assets and liabilities
balance. I have done nothing wrong according to FRB.”
The second bank would not let you write checks on your account until the $100 check on the first bank had cleared. Of course, the second bank might give you instant access to the $100 in your account if you gave the second bank a $100 lien on your house, but then that second $100 is backed by your house. So you either are limited to your $100 account at the first bank, or if you choose to pass your checks to 100 additional banks, the total dollar amount in your accounts is limited to the value of your house. Either way, every checking account dollar is backed by a dollar’s worth of bank assets.
Mike,
As usual, you don’t pay attention, so here is the important line again: “Lets
take a look at FRB from the idea that these activities should be open to
everyone, after all, they are harmless, if not outright beneficial to society.”
Further, the bank has no control over when or where I write a check, they
only have a say over when and where they pay on the check. I have opened many
accounts in my life, in every single case I was immediately given a stack of
checks and was told that I could immediately start using them. Of course these
are moot points, as I said above, we are assuming that FRB and all of its
activities are open to every citizen.
Yours Truly, the heretic and poor lost soul, Sy Akhplart
Baxendale is trying to justify his acceptance of the fractional reserve banking. Prof De Soto clearly explained in his lecture that this feature of the first draft of the law – the presence of the third kind of banking accounts – must be eliminated, and that only the time deposits with 100% reserve and demand deposits can exist.
I think that prof De Soto should be informed about this new development. I am sure he would immediately withdraw his support for this fraud. This proposal means the fractional reserve system, pure and simple.
The funny part, Nikolaj, is that I think Toby thinks he’s moving the free bankers closer to 100% reserve. Interesting, and telling, that you see it the other way. In fact, I agree with you as to the direction Toby is moving.
Nikolaj,
If a bank borrows money from a customer, and contractually obligates to repay it at some future time, but also promises to try to repay it earlier, on the demand of the lender–unless it can’t, in which case it can invoke some option clause, would you call that a genuine “demand” deposit?
And how the f*ck can this poppycock be even alluded to as “free” banking?
“Libertarian” adherents of “Austrian school of economics” designing fascist monetary systems. Just f*ing lovely.
ElwoodPDowd wrote:
Firstly, the $100 in this second account will be froze untill the check will come back from the clearing house. So you will be not able to spend the money meanwhile.
Secondly, this check once cleared, the $100 in your first account will become $0,00, and also, $100 in the reserve of the first bank will be transferred to the reserve of the second bank.
Thus the process that you described cannot happened.
Just try it !
Gerry,
As I said to Mike above, you have not read carefully, so here is the
important line again:
“Lets take a look at FRB from the idea that these activities should be open to
everyone, after all, they are harmless, if not outright beneficial to society.”
I am perfectly aware that the actions I describe are opposed by the banks,
and in fact it is called check-kiting and will land you in jail if you are
caught. That is my entire point if you will bother to read my first post.
However, you are wrong about the bank holding my checks anyway, my bank
routinely credits my accounts and gives me access to the funds as soon as I
deposit my checks. Possibly because I am such a good customer and I have a truly
incredible credit rating. Of course these are moot points, as I said above, we
are assuming that FRB and all of its activities are open to every citizen.
Yours Truly, the heretic and poor lost soul, Sy Akhplart
The point is that even if your check is not freeze by the bank, this check has to be cleared, and this check once cleared, the $100 in your first account will become $0,00, and also, $100 in the reserve of the first bank will be transferred to the reserve of the second bank.
Gerry,
Try reading the whole post and following the sequence. On the same day that
the first check clears at the first bank, a check is deposited from the one
hundredth bank in the amount of $100, keeping the balance at $100. This process
is sustainable indefinitely under the rules of FRB, as long as I am allowed to
do the same things the bank is allowed to do.
Yours Truly, the heretic and poor lost soul, Sy Akhplart
Once the first check is ‘cleared’, that means that there is no more money in the first bank account, $0.00, and also, that $100 is transferred from the reserve of bank 1 to the reserve of bank 2. There is also $100 in your account in bank 2. It is just a normal transfer of money from one account in one bank to another account in a different bank: no more, no less. Everybody is allowed to do that.
Thus, you cannot have the first $100 in each of the hundreds bank’ accounts at the same time, on an continual base, all year long !
Why? Because of the clearing process.
“Thus, you cannot have the first $100 in each of the hundreds bank’ accounts at the same time, on an continual base, all year long ! Why? Because of the clearing process.”
The way you get around it is to continually write checks from one account to the next so that there are always enough “funds” to clear the checks written earlier.
Bart, if you have really deposited $100 in cash in the first bank, you will have enough fund to cover the first check that you deposit in the second bank. Once this check is cleared, you will have $100 in your second bank account, ready to cover a second check from this second account deposited in a third account in a third bank, and so on.
And each time the $100 is transferred in a new account, the precedent account will come to $0.00.
Also, not forgetting that there is also another amount of $100 being transferred from one bank’ reserve to another bank’ reserve, in parallel.
Gerry and Mike,
Elwood’s point was that although “check kiting” is illegal to most people, it’s equivalent to FRB, which banks are allowed to engage in. Stop saying that Elwood’s plan wouldn’t work, that is exactly the point he is making.
p.s. Excellent post, Elwood…
“And each time the $100 is transferred in a new account, the precedent account will come to $0.00.”
Yes, but it doesn’t happen instantaneously. Until the check is actually cleared both accounts could have, on paper, a balance of $100. I understand that once the check clears it will transfer the money. The point is that during the delay between depositing the checks and the checks clearing you could carry a paper balance of $100 at many banks at the same time.
The way he presents his system, he could not «have 100 accounts, each with $100», because each time a check is cleared, the corresponding account goes down to $0.00: there is no more $100 in those accounts.
He could have a few banks with $100 each at the same time if he is fast enought, and if there is no check freezing at all, but his system is not sustainable past the delay for clearing, because at this moment the first accounts will begin to drop down to $0.00 one after the other, and this as fast as he has open those accounts.
Anthony:
Check kiting does not equal fractional reserve banking. Banks do not issue money without getting assets of adequate value in exchange. A check kiter, on the other hand, tries to issue $1000 of checks based on only $100 deposited, with no additional assets offered.
Anthony,
Thanks. By the way, Mikes post is slanted by his version of the Real Bills
Doctrine, but nevertheless he is wrong. In my original post I specifically point
out that every liability is matched with an identical assett, in exactly the
same way that the banks balance newly created credit money against the loans
that they make with the money. Mike Sproul insists that fractional reserve
banks are perfectly trustworthy, since I am loaning perfectly trustworthy
entities money, those loans must be “assets of adequate value”. In my example,
my books balance perfectly, and as long as I am not arrested, I defy anyone to
show that it cannot work as I described. Timing, as Gerry so clumsily emphasized
is the key. Gerry is wrong, it is a small matter to arrange the timing so that
the system works perfectly, especially when you consider the rate of return I
expect, if needed I could employ people to help me manage the timing. He also
doesn’t seem to understand the circular nature of the system, the fact that as
each account drops to $0, it is immediately replenished to $100 by a check from
the bank before it in the circle.
The biggest question of all has not been approached by anyone so far. What
about that $1,638,000 at the end? What did I do to earn that? What economic good
or service was it that I provided in exchange for that wealth?
Yours Truly, the heretic and poor lost soul, Sy Akhplart
1- If you succeed to do it circular before the first check is cleared, then you will have $200 in bank 1 instead of $100.
2- Having made just one round of checks, once the checks begin to be cleared, all the accounts will drop to $0.00, one after the other, in a circular manner, except for bank 1 which will come back to $100. Then the system will stop, circular or not, and you will be again to your starting point.
3- If the last check, from bank 100, is deposited in bank 1 just after the first check is cleared, instead of before, then the account of bank 1 will come back at $100 again, but all the other accounts will fall to $0.00, and the system will stop. You will be again to your starting point.
4-To replenish the accounts you will have to start all over again with another round of checks. There is no automatic replenishing when the system is circular, no more than when it is linear.
Gerry,
So sorry, I think I finally see the problem we are having, I thought I made
it clear that it was not an automatic process, I of course will have to
continuously write checks to keep it going. Sorry for the misunderstanding.
Yours Truly, the heretic and poor lost soul, Sy Akhplart
P.S. It should be “demand deposits with 100% reserve and time deposits” in my previous comment.
Recently, I lent $500 in paper bills to a friend in exchange of an IOU from him. I took this IOU and went to a merchant to buy $500 of merchandises. After the merchant had checked the credit of my friend, the merchant accepted to exchange my IOU for $500 of his merchandise.
Meanwhile my friend spent his $500 in paper bills here and there, so that there was $1 000 spent in the economy in the same laps of time.
Was it legal ?
F*ng deeply illegal, immoral and outright satanistic, according to the lovers of “free market” here.
Off your meds, I see. Truly a sad sight.
Of course it was legal, but this isn’t what happens in illegitimate FRB. In FRB, you don’t spend your friend’s IOUs, but you spend currency which is deemed “as good” as the original currency which you lent your friend, and is backstopped by a central bank with the ability to print an unlimited amount of money which MUST be accepted, whether you believe in its credit worthiness or not.
King George, change the word ‘friend’ by the word ‘bank’, and look at the result.
Like I said, your friend has no monopoly on central banking. The problem with FRB isn’t FRB, it’s central banking and currency monopolies. FRB is fine so long as it’s consensual, but the whole taxation/central banking thing kind of mucks around with that.
Please enlighten me, where is it written that you must accept dollars, euros or whatever? Like for exampple, I go to your place and say, “man, accept this pile of Ben Franklins for your TV set and suttufukup”, right? You think it’s mandated by law?
Maybe it’s time to cut on these conspiracy theories, huh?
Meh. Try to pay your taxes on sales and income or debts in anything other than FRBs and tell us how much success you have in doing so.
P.S. Why are you so angry?
That’s where you are required to PAY dollars. Where is it written you have to ACCEPT them?
For goods and services, you may be right, but not for debt:
http://www.ustreas.gov/education/faq/currency/legal-tender.shtml
However, I would be surprised if the courts looked kindly upon a business that insisted, e.g., that its customers provide Euros in payment.
Insisting payment in foreign exchange is totally normal in specific parts of economy, for example international trade. Please cite a single example of a litigation for such practices.
OK, I take it you acknowledge the point that by law creditors must accept dollars for payment of debts, so your main question has been answered. No need to thank me.
Re. the euros example, that was probably a poor choice on my part. I’m not aware of any specific court cases, but the point I was trying to make was that if there was not a “legitimate” (as defined by the courts) business need for not accepting dollars (eg, exporters/importers, the hassle of dealing with small or large denominated currency units), I suspect it would be difficult for a business to refuse payment in dollars and not run into conflict with the authorities.
I do believe that thinking of a world with freer banks with no centralized mechanism for control is unlikely to gain traction as a concept. It would probably work within a simulation framework based on reasonable assumptions – but herein lies the problem. As with most, if not all, economic descriptions of society, inability to correctly account for human behavior leads to inadequate forecasts and almost terminal banking crises. Free market thinking has failed society and delimiting banks further will only exacerbate the problem. I complete rethink of the problem is necessary that would change the underlying philosophy of how we control private banks. The problem is banks have been allowed to conduct short-term profit as the reason for their very existence. Better still is to move from profit focus to societal focus which is automatically longer in horizon. Although the private banking sector is critical to equilibrating markets, short term profit objectives lead to unstable outcomes. Aligning banking focus, via code of conduct or similar, to longer term societal objectives would inhibit poor lending practice as societal targets (e.g. living within means,) would not allow for it. This would break the current deadlock between quant. easing funds getting trapped in the financial system as banks would be guided by the code of practice to lend it into the real economy rather than invest into stocks which on the face of it is inefficient in current times. Good infrastructural investment (e.g. rail or IT infrastructure) provides new frameworks into which new and innovative business can thrive. Using this societally focused model, the current crisis would not have happened. I have been blogging this idea for several months, this is available to view at my website.
Define “society” and its “objectives” you collectivist hack
Banking organized on a free market basis. When was that, 18th century Scotland? Or rather 2000 BC in Ur?
To Toby Baxendale : usually a timed, or term, deposit account is a 0% reserve type account: all the money is loan out by the bank.
So I don’t understand how it can be in the same time «a robust 100% reserve type account», as you seem to suggest. Is it what you really suggest ?
So, if I understand Dowd correctly, the bankers dreamed up a clever plan that would allow them to make money thanks to a special licence that allows them to do what no-one else is allowed to do? Shorely not! Even allowing for the appallingly cynical view of human nature that this suggestion assumes, in order to do this, wouldn’t they need to be in bed with the rulers of the land? Shorely, shorely not!
You too are legally entitled to write practically any amount of IOUs (promissory notes anyone?). No one would want to accept them? Geee, that’s too bad. Start thinking why is it so.
Get a life, stop whining.
Steve,
It’s always a pleasure to be in agreement with you.
As for Toby Baxendale, I don’t think that he thinks he is moving you closer to the 100% system. He maybe wants to make that impression rhetorically, because he wants to appease the sissies among the 100% reserve people. He assumes that all of them would react in a similar way couple of us did here, had he conceded openly that he went along with you (as he clearly did). Instead, he wants to have it both ways (just like his bank customer:)), i.e. to lull the 100% people into believing he is proposing some kind of compromise, while actually (re)instituting the fractional reserve banking, pure and simple.
Stephan,
that does not have much logical sense. Banks will always be able to repay some loans earlier than agreed. If a bank says; you know, generally we are not doing this stuff, but if we have enough money we are going to pay your time deposits on demand (as you suggest) – how on Earth is that different from the conventional fractional reserve banking? I am not discussing at this moment the merits of 100% system versus the FRB, I am just pointing out that the Baxendale’s proposal is just a FRB in a new rhetorical disguise, not any kind of third, previously unheard of model.
Nikolaj, what I’m asking is this: why would you condemn as an illicit “deposit” arrangement a case where the bank is not contractually obligated to repay the loan on demand, earlier than some nominal fixed or future term, but where it simply holds out the possibility that it might be able to do so if the customer requests it?
I think we need to separate the economic and legal questions here. The legal question is a libertarian one: do we permit capitalist acts between consenting adults? The economic one pertains to one’s evaluation of and predictions concerning the prevalence and success of various types of (licit) banking/monetary arrangements. When discussing legal policy it seems to me the former question is of greater pertinence. We don’t need to know for sure whether Wal-mart or mom-and-pop stores will predominate before we establish a property-rights respecting free market system that would generate the answer. Likewise we don’t need to agree on our economic-based predictions of how FRFBs would fare in a private society, before we endorse a system that respects private contractual financial arrangements between market actors. I personally agree with the Rothbardians that FRB would not be popular but normatively and legally all I’m concerned about is protecting property rights. Do you agree with this?
Stephan,
Do you agree with this?
http://mises.org/journals/qjae/pdf/qjae1_1_2.pdf
I agree with the economic aspects at least. With the legal part I’d have to re-visit it. In any case I think capitalist acts between consenting adults may not be legally prohibited.
How is it two claims to the same piece of property if the depositor receives an IOU to claim the balance in the future, OR acknowledges that he may not withdraw his money at any time but that it is subject to risk? So long as the bank informs him what he is getting into, why would it be fraud? In a commodity system without central banking, it is not the value of gold (or any other base) itself that would be inflated, but only that bank’s private currency were they to engage in excessive risk-taking. The value would depreciate as a result. There is nothing fraudulent about this as all deposit holders agreed to take on this risk when depositing their funds in the bank.
Why not just demand that banks have all liabilities backed by similarly timed assets, i.e. ban maturity transformation.
If a bank has x amount of 3 month savings deposits then it must have x amount of assets with 3 (or less) month maturity. For all demand deposit accounts bank must have equal amount of liquid assets.
Am I missing something here?
Yeah, commie, what you’re missing is actually free market. What’s your problem with me and my buddies managing a lil maturity mismatch, huh? What’s wrong with that if we inform our customers that there is a risk to it (as banks mostly do)? Borrow short, invest long, profit is ours, as well as risk is. What’s your problem?
Why do I get the impression that month over month so many of you self-assessed libertarians and Austrian schoolers turn into plain vanilla fascist-comunists?
Hilariously and well said.
Get rid of taxation and the central banks and you’ll have a point. I agree that FRB isn’t the devil when you have true freedom of choice. Without the central banking FRB would have a physical limit, based on supply/demand, and not on arbitrary political considerations. Without taxation and other laws against private currencies you would not be artificially propping up demand for FRNs.
Would FRB be stable without a central bank? Dunno… but that “stability” has been shown to not come for free.
We are not talking about the free market, we are talking about the UK banking reform proposal.
What I was suggesting is that the proposal would perhaps be better (yet not too far off from the original proposal as to be politically unrealistic) with just a simple ban on maturity transformation.
Our current system is far from free and, as “King George” said, we should first get rid of central banks before we can even dream of a free banking scenario.
So given current conditions, I repeat: Wouldn’t Baxendale’s proposal be simpler, better and in line with his original idea, if it would just ban maturity transformation in banks.
If you’re going to ban maturity mismatching then why permit bond markets. A bond market takes something like a ten year debt and allows it to pass between hundreds of people for very short times.
Well, this is a fine display. Has anyone even bothered to put forth a reasoned argument against Toby’s proposition, or are you just going to stick with the ‘OMG IT SOUNDS LIKE FRB AND ROTHBARD SAID FRB IS BAD!!!!” thing?
If anyone can provide a sound argument for how this type of account is categorically any different contractually from anything else that 100% reserve types would approve of, I’d be quite impressed. Frankly, I don’t think it can be done, and it exposes the entire argument against FRB as fallacious, as the monetary consequences of this type of account would be no different from FRB. Thus the current devolved state of the comments section.
I agree about the comments section being strangely base on this blog entry. Regardless, I’m not too knowledgeable since I’m new to all this, but it seems to me from what little I’ve read the main issue with FRB is that it’s essentially a fraud that can only be maintained with the help of a government, otherwise bank runs or the threat of a bank run would prevent such practices.
As far as this proposition, it seems fine to me. I agree that it sounds like FRB, however I think that it is different in a key area–the deposits are really time deposits. I don’t know much about how all this would affect anything, but it seems to me that it would not be a fraudulent system since the depositor would understand the bank could tell him no to his demand.
The issue here isn’t the instant demand; it’s the timed deposit concept itself. How can a bank guarantee the depositor his money in 3 months time, or 6 months time? It’s impossible unless the shareholders in the bank have that money themselves. The bank cannot rely with certainty on borrowers being able to make their monthly payments.
In effect, a timed deposit is a form of investment that entails risk. We, the bank, will pay you 6% interest on a 1 yr TD, if we happen to have the money at that time. If we don’t, we’ll try to get you the money as soon as we can, unless of course the bank is liquidated, in which case you might get a crumb from the liquidation.
The only deposit that doesn’t entail risk, apart from fraud or theft, is the warehouse deposit, where the depositer retains ownership of his deposit. The depositer would pay a fee, as already discussed. His capital will decrease, but not necessarily his wealth.
If at the end of the year, his reduced capital can buy more than the original capital could buy at the beginning of the year, then he’s still ahead of the game.
Re banks in general: I think they may be dinosaurs, anyway. Were it not for govt. interference (i.e., regulations), I suspect there’d be a free market in loans where individual lenders could sponsor individual borrowers via an on-line exchange. In effect, an eBay of loans.
“The bank cannot rely with certainty on borrowers being able to make their monthly payments.”
Well I would think that’s where the market comes into play. Banks that lend smartly to creditworthy borrowers will be successful. Banks that lend foolishly will go out of business.
I agree, but as Kinsella has pointed out, the main issue here isn’t economic; it’s legal. Should the officers of the bank be charged with fraud or theft if they can’t return the depositor his money with interest? What exactly is the bank promising?
Most depositors today believe (falsely, according to the law) that they own the money they deposit. If they really did own it (i.e., via a warehouse account), then they could breathe a little more easily, knowing that it doesn’t matter how poor the bank is at business, so long as the bankers aren’t dishonest.
“Should the officers of the bank be charged with fraud or theft if they can’t return the depositor his money with interest?”
That would be a breach of contract.
Why would it be a breach of contract if the deposit was treated as a bond and the risk was assumed? If that happens the bank goes bankrupt, but we don’t throw all of the officers in jail since the risk was assumed and not fraudulent.
They assumed an obligation to pay. If they cannot that is a breach.
ABR
“I suspect there’d be a free market in loans where individual lenders could sponsor individual borrowers via an on-line exchange. In effect, an eBay of loans.”
There already is!
Google loan marketplace
“The legal question is a libertarian one: do we permit capitalist acts between
consenting adults?”
Apparantly the libertarian position is that any financial arrangement between
two parties is in itself legal, even if it is part of a larger non-consenting
illegal act. For instance a contract to have someone murdered would be legal,
only the actual murder is a crime, and only the actual murderer is guilty.
Yours Truly, the heretic and poor lost soul, Sy Akhplart
Contracts are title transfers, so not sure what a contract to murder is. Do you mean if you agree to pay X to murder Y? The contract is simply a one-way title transfer: you pay X IF he does such and such.
And no, this would not be “legal”, since it’s part of the causal chain of cauing the death of Y. See my Causality and Aggression article with Patrick Tinsley, at http://www.stephankinsella.com/publications
Whew, I am glad to hear that. So you are saying all of the contracts involved in
FRB would be illegal if it were determined that FRB was a method of taking
wealth from third partiest, who were not involved in the contracts, without
their consent? I wonder how you do that without simultaneously resolving the
complicated economic questions that show whether this has happened or not?
Yours Truly, the heretic and poor lost soul, Sy Akhplart
“So you are saying all of the contracts involved in
FRB would be illegal if it were determined that FRB was a method of taking
wealth from third partiest, who were not involved in the contracts, without
their consent?”
But it is not, so it is not.
Along this line of reasoning one should expect in a perfectly libertarian society according to some that ANY production of WHATEVER would create a ceaseless stream of litigation due to externalities and drop of marginal value.
Damn, it just occured to me why so many of adherents of the Austrian school are lawyers
Glad to hear this, I look forward to everyone being allowed to engage in the
practises that constitute FRB, what a wonderful and prosperous world it will be!
Yours Truly, the heretic and poor lost soul, Sy Akhplart
I see clearly how this could work. It is really like a callable bond with some conditions attached. It would satisfy depositors who both want interest and to be able to call the balance on demand. The bank could either keep reserves on hand or have a specific line of credit for this purpose. Alternatively, it could buy the bond back off you and immediately turn around and sell it in the secondary market. There would be a fee based on how quickly you wanted your money (instantly, in a few hours or in a few days). There is very little difference here to the bondholder with a noncallable who sells his bond in the secondary market himself. The bank is merely providing a service to a bondholder who does not have convenient access to the secondary market.
This is perfectly compatible with 100% reserves as the bond would only be redeemed when there was cash available to do so. However, I suspect the Free Bankers would not be happy as they are all closet inflationists!
Btw it would be more proper to call this a putable bond!
I suppose someone will object that bank runs can result from maturity mis-matching, where the bank could have met all its obligations if only it had 30 days to liquidate its assets, but of course if the bank’s assets are payable in 30 days, while its liabilities are due now, then if the present value of those assets is less than the liabilities, that bank is insolvent.
The webpage, http://www.planmon.webs.com is about money and the fractional reserve system and makes a monetary plan based on 100% reserves.
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