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Thread: After the FED is ended: Free Banking or Full Reserve Banking?

  1. #1

    After the FED is ended: Free Banking or Full Reserve Banking?

    It is my understanding that there is a conflict in opinion among Austrians and libertarians as to whether 100% full reserve banking should be the way to go, or the free banking system.

    "Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency (banknotes). In a free banking system, market forces control the supply of total quantity of banknotes and deposits that can be supported by any given stock of cash reserves, where such reserves consist either of a scarce commodity (such as gold) or of an artificially limited stock of "fiat" money issued by a central bank. In the strictest versions of free banking, however, there either is no role at all for a central bank, or the supply of central bank money is supposed to be permanently "frozen." There is, therefore, no agency capable of serving as a "lender of last resort" in the usually understood sense of the term. Nor is there any government insurance of banknotes or bank deposit accounts. "-http://wiki.mises.org/wiki/Free_banking
    "Full-reserve banking is a banking practice in which the full amount of each depositor's funds are kept in reserve (as cash or other highly liquid assets) when each depositor has the legal right to withdraw them. In other words, deposits available for immediate withdrawal would not be lent out for extended periods but rather would be retained by the bank to allow the depositor immediate access to the funds. Only certificates of deposit (or term deposits) would be used for normal lending activity. Full-reserve banking was practiced historically by the Bank of Amsterdam and some other early banks but was displaced by fractional reserve banking after 1800.[1] Proposals for the restoration of full-reserve banking have been made,[2] but are generally ignored or dismissed by mainstream economists, who believe that the costs of such a change would outweigh any benefits.[3]"-http://wiki.mises.org/wiki/Full_reserve_banking
    I tend to agree more with those like Hayek and Selgin that support Free Banking. Of course I am certainly not hostile to those such as Rothbard and Irving Fisher who propose Full Reserve Banking.

    Any thoughts and opinions on this?



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  3. #2
    My choice would be to bank with a low leverage bank.

    Free markets after the Fed means just that - no imposed form of banking. Bank with whichever institution provides you the most service based on your comfort level.

    I'd probably have about 80% of my deposits on no leverage and the other 20% wildly leveraged for growth.

  4. #3
    I don't see a problem with free banking as long as there is no lender of last resort, FDIC insurance, bank bailouts, etc. Banks that extend too much credit will put themselves in a more risky position to fail. If the shareholders and deposit holders are willing to take that kind of risk, no one should stop them.

  5. #4
    Yep.

    Quote Originally Posted by tsai3904 View Post
    I don't see a problem with free banking as long as there is no lender of last resort, FDIC insurance, bank bailouts, etc. Banks that extend too much credit will put themselves in a more risky position to fail. If the shareholders and deposit holders are willing to take that kind of risk, no one should stop them.

  6. #5

  7. #6
    Pass Ron's Free Competition in Currency Act and let the market decide.

    I'd prefer full reserve for my money but it would depend on the difference in interest rates too.

  8. #7
    I support free banking and competing currencies.

  9. #8
    Quote Originally Posted by jkr View Post
    nobanks?
    Wow, even full reserve banking advocates like Rothbard don't go that far.

    I can understand the argument that fractional reserve banking is fraud, even though I disagree, but I don't understand how investment can be considered a bad thing.

    One of the arguments against Austrians is that, if there was no Fed, how would we be able to build expensive things. The answer is that people would save money and put it in banks, which would invest in projects and allow us to grow. If you have no banks, it would be hard to get anything done.



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  11. #9
    Let the market decide what banking and currency systems people actually want.

  12. #10
    Let banks do whatever they want.

  13. #11
    Quote Originally Posted by cubical View Post
    Let banks do whatever they want.
    I agree Peter, I'm a free banking proponent as long as 0 bailouts/subsidies etc. Might be naive on my part

  14. #12
    Quote Originally Posted by cubical View Post
    Let banks do whatever they want.
    Yep. And butchers, and bakers, and candlestick makers.

  15. #13
    If I was supreme ruler of the Earth, banks, stock exchanges and other financial institutions would be limited to using ONE COMMODITY IN EXCHANGE - ONE type of hard specie backing that would be reserved to them - use of all other specie would be expressly forbidden. Let it be gold, or for that matter, paper, electronic bits, or even nothing at all, as they play their paper games. Let them even have a central bank -- a counterfeiter or lender of last resort. Let them take risks, inflate all they want, and even fractionally reserve and lend it out. It's only for banking transactions; NOT taxes, and NOT regular commerce.

    Actual commerce would be absolutely and completely unfettered, as the people (NOT BANKS) would be free to use ANYTHING at all as money - with one exception: banking currency. That would place a natural check and balance on the value of banking currency, must be converted into other specie to be useful in exchange, as it floats against everything else, but is restricted to its own sandbox. Then watch banks police themselves and clean each others' clocks, even as privately accumulated capital in all the other specie circulates and competes with all their precious "debt money".

    That would be my edict. So let it be written, so let it be done.
    Last edited by Steven Douglas; 06-11-2012 at 05:59 PM.

  16. #14
    Free market in banking = no bailouts, no growth in the monetary base, no government run insurance program

    Right?

    Why would an individual hold a demand deposit with an institution that issues more demand deposits than that which can be demanded under such conditions?

    We do so now, because the government is propping up the banking sector in a fairly significant and constant behind the scenes fashion. No matter how inept the bank loans out money and no matter how many people withdraw funds, we know we'll be fine as government will always guarantee our deposits.

    The rules change with free banking. While perhaps you or I might trust a non-100% reserve bank without backing...institutional depositors would not. The big companies and investment firms would pull their money out of the banking system and this would create a feedback loop of falling asset prices, bank asset sales, followed by more following asset prices/bank sales as the credit ratings of free banks would collapse as depositors pulled out money which would encourage more withdrawals.

    Rothbard is right...there would be no free market in banking. It would all quickly and without warning burn-up in a liquidity fire..the invertible consequence of falsely issuing more demand deposit promises than you have in assets.

    What TRUELY has to happen for us to have a free market in banking is a change in tax policy. As is now...only bank deposits can pay our tax bill. Not dollar bills, not gold, not the monetary base. If we want to have free banking we need competitive currencies (other ways of paying taxes than dollar deposits) and/or direct access to Fed Funds. We can only access Fed Funds through banks right now, and this gives them an unfair advantage in the market. If we had a national depository, we wouldn't have these problems.
    Last edited by rpwi; 06-11-2012 at 06:09 PM.

  17. #15
    free banking fanboy here.
    Quote Originally Posted by Torchbearer
    what works can never be discussed online. there is only one language the government understands, and until the people start speaking it by the magazine full... things will remain the same.
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  18. #16
    Quote Originally Posted by IDefendThePlatform View Post
    Pass Ron's Free Competition in Currency Act and let the market decide.

    I'd prefer full reserve for my money but it would depend on the difference in interest rates too.
    Interest (ie, paying you) rates would be low, but that's ok since there would be no inflation.

    The problem with free banking is two fold:

    First, if banks were to issue their own currency, not back by gold/silver, then it's just a local form of fiat banking. The problem with this is that people would still see inflation if at least one bank on an exchange wasn't back by gold. Horrible ideas.

    Second, without backing by gold or another precious metal, banks wouldn't have measurable level of currency stability. They're value/stability would be subjected to market fluctuations, and form of boom/bust if investors over valued a banks holdings.



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  20. #17
    I 100% support a market regulated by strictly market consumers (i.e. the free market) to determine what is best.
    My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right, tend to be unwilling or unable to accept blame )

  21. #18
    Do..does free banking mean a bank can offer me 100% per annum for my deposits if I trust them, as an example?

    Rev9
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  22. #19
    Quote Originally Posted by Revolution9 View Post
    Do..does free banking mean a bank can offer me 100% per annum for my deposits if I trust them, as an example?

    Rev9
    Big IF.

  23. #20
    Quote Originally Posted by cubical View Post
    Let banks do whatever they want.
    Terrible idea, that's called the Fed.
    "If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be." - Thomas Jefferson

    "It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds" - Sam Adams

  24. #21
    Quote Originally Posted by thoughtomator View Post
    Let the market decide what banking and currency systems people actually want.
    Hayekian's believe that free-banking is free-market.

    Rothbardian's believe that free-banking is fraud/statist/not free-market.

    Both believe you are correct and both believe the other are wrong. Have fun
    Last edited by Gumba of Liberty; 06-12-2012 at 12:51 AM.
    "If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be." - Thomas Jefferson

    "It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds" - Sam Adams

  25. #22
    There are probably four positions one can take on this.

    A) Status Quo. Pro-fractional banking with government support

    B) FRB is a good thing and would thrive in a free/unsubsidized market

    C) FRB is bad thing but should be legal and the market will naturally rectify the fraud.

    D) FRB is a bad thing, is fraud and should be illegal.

    I favor D. A is a joke. B is not possible nor logical. With C, too many people would get hurt and we would end up with government intervention again.

    With D, we can make a quick and smooth transition out of FRB which would never happen under A,B,C. We also don't have to wait for government to abolish FDIC, Fed Funds targeting, discount window lending, Treasury Tax & Loan program, changing legal tendar laws, etc...

    We already prohibit fractional banking to a degree with reserve requirements (granted this is being undermined by sweeps and MB growth from fed funds targeting), but it would be a good place to start to get us off of FRB. The reserve ratio could be steadily increased until it hits 100%. With the money multiplier being at historical lows, this is a good time to do that. Then the reserve requirements have to be changed from a two-week average to an absolute. A bank should NEVER be able to violate this at any time. A parallel solution would be to enact a national depository at the treasury in which citizens could exchange their federal reserve notes/fed funds for treasury notes and treasury deposits. Being able to access 'electronic money' directly would go a long way in fixing the dependency we have on banks now.

  26. #23
    In a true, 100% free, no restrictions banking I could open a bank and even without any deposits loan out as much money as I want. On the other extreme, if I had a true 100% reserve requirement I would have to keep 100% of all money deposited on hand and thus would not have any available to make loans with.
    Last edited by Zippyjuan; 06-12-2012 at 01:37 PM.

  27. #24
    A free market in banking with strictly enforced fraud laws and no corporate personhood would end up in 100% reserve banking. With the definition of 100% reserve banking being that bank would hold 100% of all demand deposits in reserve, and is free to lend all time deposits as they wish.



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  29. #25
    Quote Originally Posted by The Gold Standard View Post
    A free market in banking with strictly enforced fraud laws and no corporate personhood would end up in 100% reserve banking. With the definition of 100% reserve banking being that bank would hold 100% of all demand deposits in reserve, and is free to lend all time deposits as they wish.
    Perhaps interesting to note (I ran the numbers a couple of years back using Federal Reserve money supply figures and don't have them handy) but about ten percent of all bank deposits are currently in demand accounts and the reserve requirement for most banks is set at 10%. I guess that would mean that we are basically already there.
    Last edited by Zippyjuan; 06-12-2012 at 01:41 PM.

  30. #26
    Quote Originally Posted by Zippyjuan View Post
    Perhaps interesting to note (I ran the numbers a couple of years back using Federal Reserve money supply figures and don't have them handy) but about ten percent of all bank deposits are currently in demand accounts and the reserve requirement for most banks is set at 10%. I guess that would mean that we are basically already there.
    Hopefully, I have the right numbers, but there are 1.6 trillion dollars in reserves:

    http://research.stlouisfed.org/fred2.../TRARR?cid=123

    Then there are I believe .75 trillion in public demand deposits:

    http://research.stlouisfed.org/fred2...EMDEPNS?cid=25

    Does that mean banks aren't creating deposits in excess of reserves? Well no, because we're not considering near demand deposits (M2/M3). When you factor this...and that these deposits are also laying claim to the same reserves (indirectly) that M1 is, you see we still have quite the problem.

    So we are by no means already at 100% FRB thanks to the epic creation of MB by the Fed and lack of lending by banks. Only when M1 reserves are put in a 'lock-box' outside of access to M2 can we claim 100% FRB. Now even counting the higher aggregates the money multiplier is at historic lows...so the time is NOW for reform (in fact the M1 money multiplier is negative...deceptive because this ignore M2 claims).

  31. #27
    Thanks for the figures. In short- the charts show that Demand Deposits at commercial banks are $780 billion and total reserves (of all depository institutions not just commercial banks so it is not a complete measure of demand deposits) are $1.2 trillion so that more than satisfies the suggestion by The Gold Standard that they keep 100% of demand deposits on reserve and are free to loan out as much as they want of the rest (reserves exceed demand deposits by $440 billion).

    M1 includes demand deposits but a lot of other things as well:
    http://research.stlouisfed.org/fred2/series/M1

    and that is listed as $2.2 trillion.
    Notes:

    M1 includes funds that are readily accessible for spending.

    M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.
    A more detailed breakdown of M1 indicates that $770 billion of M1 is in the form of demand deposits and $422 billion in the form of "other checkable deposits" so even including them (a total of $1.2 trillion which matches the $1.2 trillion in reserves), the 100% requirement for demand money is certainly met. http://www.federalreserve.gov/releases/h6/current/ As of May 28th 2012, $1.039 trillion was in cash and $4.1 billion in travellers checks.
    Last edited by Zippyjuan; 06-12-2012 at 02:39 PM.

  32. #28
    Quote Originally Posted by Zippyjuan View Post
    Thanks for the figures. In short- the charts show that Demand Deposits at commercial banks are $780 billion and total reserves (of all depository institutions not just commercial banks) are $1.2 trillion so that more than satisfies the suggestion by The Gold Standard that they keep 100% of demand deposits on reserve and are free to loan out as much as they want of the rest (reserves exceed demand deposits by $440 billion).

    M1 includes demand deposits but a lot of other things as well:
    http://research.stlouisfed.org/fred2/series/M1

    and that is listed as $2.2 trillion.


    A more detailed breakdown of M1 indicates that $770 billion of M1 is in the form of demand deposits and $422 billion in the form of "other checkable deposits" so even including them (a total of $1.2 trillion which matches the $1.2 trillion in reserves), the 100% requirement for demand money is certainly met. http://www.federalreserve.gov/releases/h6/current/ As of May 28th 2012, $1.039 trillion was in cash and $4.1 billion in travellers checks.
    First of all, we don't how many of those demand deposits are actually loans and not just people depositing money in a checking account. Second of all, this should tell you why your CPI isn't rising as quickly as it eventually will. The trillions of dollars that the Fed printed and put into the reserve total have not been loaned out yet. They have room to lend trillions of dollars of that money, and when they do is when you will see your inflation explosion that people are worried about.

  33. #29
    Quote Originally Posted by The Gold Standard View Post
    First of all, we don't how many of those demand deposits are actually loans and not just people depositing money in a checking account. Second of all, this should tell you why your CPI isn't rising as quickly as it eventually will. The trillions of dollars that the Fed printed and put into the reserve total have not been loaned out yet. They have room to lend trillions of dollars of that money, and when they do is when you will see your inflation explosion that people are worried about.
    Not relevant where the money came from really but at any rate, how many people are going to borrow money and then stash it in a zero interest account? The percent should be quite small.

  34. #30
    I certainly support a free-banking system. However, as a consumer under such a system, I would likely save primarily with a near-full reserve bank with gold-backed deposits.
    “Do you not know, my son, with how little wisdom the world is governed?” - Oxenstiern

    Violence will not save us. Let us love one another, for love is from God.

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