Regardless of whether there is a central bank or not, society needs a sensible rule framework around creation of credit. The free market needs to operate withinh those rules.

Interesting. I didn’t know that. I think the Banking School is more right than they know, but not for the reasons they think. It is true that the new money will be liquidated as the loans are repaid; that’s called a recession.

“Why will banks go broke rather than raise interest rates or curtail printing money, which you would think would be the reasonable thing to do?”

One possible explanation- the initally higher profits of FRB decline as more and more bankers
practice FRB. Competition drives profit margins down to levels that are no higher than in any other endevour.
There is one solution for this that FR banks cannot resist- expand the size of lending.

In the debate between the Currency School and the
Banking school, the latter trotted out The Law of the Reflux, as put forward by Fullarton, it says that FRB will not cause inflation as any money that is loaned into existence will be liquidated as the loans are repaid and the money retired out of circulation.
This would be true only if lending by banks did not expand continually.And of course they have a powerful incentive to do just that.

When I wrote “When no central bank existed…”, I didn’t mean that the US had no central banks in the 19th century. I was referring to the periods in the 19th century when we did not have central banks.

You should read Rothbard’s history of the 1820′s crisis. Banks in the NE US remained solvent. Banks in the South and West printed money like crazy. This happened before the creation of the central bank. Of course, its creation only made things worse. The Western and Southern banks did lose gold to the NE banks, but rather than rein in their runaway monetary inflation in ways you suggest, they simply went broke. Then they blamed greedy businessmen and speculators. While the banks in the NE remained solvent, their communities suffered terribly. One source I read on the crisis estimated unemployment at 80% in Philadelphia, New York and Boston. Hundreds of factories went bankrupt. I believe it might have been worse than the depression of the 1930′s.

Why will banks go broke rather than raise interest rates or curtail printing money, which you would think would be the reasonable thing to do? Because bankers have always followed, and still follow today, some version of John Law’s Real Bills Doctrine; that’s why the RBD is sometimes called the “banking school” of monetary theory, as opposed to the quantity theory. As a result, they don’t believe they are the problem. For the four centuries since John Law’s debacle in France, including today, bankers always have blamed every crisis on greedy businessmen and speculators. They are never at fault in their minds, just as the Fed never finds any fault with what it does.

As long as bankers subscribe to some from of the RBD, fractional reserve banking will exist and will continue to cause financial crises as it has for over six centuries. Economists haven’t been able to convert a single banker to the quantity theory in 200 years; I doubt there is much chance of it happening in the next 200.

“Fractional banking has been popular since it began in Venice over 600 years ago. I don’t see how you would eliminate it; it’s too lucrative. Look at the history of the US in the 19th century. When no central bank existed, fractional banking was wide spread.”

In the absence of any government intervention at all, how would fractional banks avoid losing gold to solvent banks? The only option is to curtail lending, raise interest rates on loans,and retire their over-issued notes from circulation. This is
spelled out by Mises in Human action.

Also, there were two central banks in in America
before the Fed was created.The second in particular caused an inflationary bubble in land prices.The end was painful.Absent a central bank,
this would have been avoided, or greatly lessened.

In all my reading on banking and money I find one dreary example after another of fractional bankers either going bust, curtailing their issuance of notes, or enlisting government for protection in one form or other.(their favorite.)

That’s true, but the suffering was real, deep and wide spread. Check out Rothbard’s book on the depression of 1820.

newson: “the regularity of bank runs (thanks to fractional reserve banking) rightly made the public more wary about banks in general”

And caused people for fall for the nonsense of creating a central bank.

newson: “…federal reserve system has only hidden the systemic risks from the public gaze and ensures when the levy breaks, the damage will be catastrophic.”

Couldn’t agree more. I don’t think the Great Depression could have happened without the Fed, and the next one will be disastrous.

I don’t think so. That was my point in citing history. Bills of exchange didn’t involve fractional banking, yet cause huge fluctuations in the money supply and severe financial crises. Fractional banking has been popular since it began in Venice over 600 years ago. I don’t see how you would eliminate it; it’s too lucrative. Look at the history of the US in the 19th century. When no central bank existed, fractional banking was wide spread. Besides banks, fractional banking is practiced today by mutual funds and life insurance companies, too. If freedom exists, there always will be someone willing to loan more than they have. There is simply too much money to be made by doing so. Hayek made this same point.

This has nothing to do with the topic, but good jobs and even the highest paid jobs are service jobs. Teachers, Engineers, Architects, Executives, Lawyers, Doctors, Musicians, Authors, Actors… primarily have service jobs. The notion that putting a car together is the ultimate middle class job is absurd.

Unless he was blind or stupid, the only explanation for this fault is that he was simply an anti-capitalist.

Actually, it’s a key apparatus of the fraudulent US banking cartel. Its existence is an affront to justice as it facilitates a subtle transfer wealth from the productive of this nation, to the parasitic elite on Wall Street and in Washington. Next to the US constitution, it has got to be the biggest and most successful con job ever pulled over the American people and it is still running as designed after almost 100 years. It relies on the state for its false legitimacy, and it isn’t any sort of economic device that would exist in a free market.

That is their purpose – to cartelize the banking industry so that the banks can inflate in unison and avoid the problem of more sound banks redeeming specie from less sound banks more deeply involved in fractional reserved lending.

“but some history I have read makes me wonder about assigning all the blame to CB’s.”

Correct. The blame goes to shady bankers who wish to partake in the fraud of fractional reserve banking in the first place. Central banks are merely an apparatus of the banks used to create the cartel that makes frbanking more subtle and lucrative.

“Venice experienced some severe financial crises in the early modern period, and the culprit was nothing but credit expansion via accounting entries. No paper money was involved. Later, bills of exchange caused similar business cycles. In the 19th century, the US experienced some severe business cycles without a central bank and those were due to independent banks expanding credit. Yes, the banks failed, but the economy also went through serious gyrations and caused a lot of non-bankers to go broke, too. The panic of 1820 is a good example.”

Yup. It is the issue of fraudulent receipts, and/or frbanking that is at the root of these cycles.

“I wonder if business cycles are just a fact of life with money? I think the only way to eliminate them is to go back to barter.”

Business cycles are a fact of life as long as fractional reserve banking persists. Central banks exasperate the problem by allowing insolvent and bankrupt banks to remain in operation after their insolvency is discovered.

If courts, contracts, bank runs and bank failures were left to the free market, central banks would not exist, and fractional reserve banking would be reduced to a tiny niche credit market – where their bills were not currency, but debt – or possibly the practice would be eliminated altogether. That would put an end to credit expansion induced business cycles. No need to dispense with money, and degenerate to barter – thankfully.

That is their purpose – to cartelize the banking industry so that the banks can inflate in unison and avoid the problem of more sound banks redeeming specie from less sound banks more deeply involved in fractional reserved lending.

“but some history I have read makes me wonder about assigning all the blame to CB’s.”

Correct. The blame goes to shady bankers who wish to partake in the fraud of fractional reserve banking in the first place. Central banks are merely an apparatus of the banks used to create the cartel that makes frbanking more subtle and lucrative.

“Venice experienced some severe financial crises in the early modern period, and the culprit was nothing but credit expansion via accounting entries. No paper money was involved. Later, bills of exchange caused similar business cycles. In the 19th century, the US experienced some severe business cycles without a central bank and those were due to independent banks expanding credit. Yes, the banks failed, but the economy also went through serious gyrations and caused a lot of non-bankers to go broke, too. The panic of 1820 is a good example.”

Yup. It is the issue of fraudulent receipts, and/or frbanking that is at the root of these cycles.

“I wonder if business cycles are just a fact of life with money? I think the only way to eliminate them is to go back to barter.”

Business cycles are a fact of life as long as fractional reserve banking persists. Central banks exasperate the problem by allowing insolvent and bankrupt banks to remain in operation after their insolvency is discovered.

If courts, contracts, bank runs and bank failures were left to the free market, central banks would not exist, and fractional reserve banking would be reduced to a tiny niche credit market – where their bills were not currency, but debt – or possibly the practice would be eliminated altogether. That would put an end to credit expansion induced business cycles. No need to dispense with money, and degenerate to barter – thankfully.

That’s true, but if you read de Soto’s book on banking you’ll see how a central bank makes it possible for individual banks to inflate far beyond what they could alone. Also, mergers have about the same effect.