Does Fractional Reserve Banking Endanger the Economy? A Debate

you might remember the beginning of it's a wonderful life right Jimmy Stewart's behind the counter there's a panic in the community people show up and they want their money and what does Jimmy Stewart have to tell him he doesn't have it well I'm sorry my gave your money to marry no I don't have it right real-life bank runs are seldom unprovoked they're almost always runs that are in trouble on banks that are in trouble beforehand that have been badly managed that their loans are not performing artificially low interest rates stimulates a boom which inevitably leads to a bust as Mises and Hayek say and that's why fractional reserve banking is inherently destabilizing you show me a bank in crisis I'll show you bad regulations not just fractional reserves takes more than that to cause a crisis how does a bank is supposed to make money if it's not allowed to take your you know pay you a low interest rate for your checking account deposit and lend it out to someone else at a higher you can earn the spread if you don't let banks do that well then they would go out of business why would there be banks okay so that's not correct welcome to this eighth debate of the so of the second season of the solo forum both to those in our physical audience at the sub-culture theater in downtown Manhattan and to the thousands around the globe who are watching us on live streaming we are a monthly debate series that features topics of special interest to libertarians and aims to enhance social and professional ties within New York City's libertarian community this is an Oxford style debate in which the audience initially votes for against or undecided on the resolution and then again after the debate is over whoever moves the vote in his or her favor is declared the winner go into solo vote calm to cast your initial vote you'll find the tonight's resolution reads fractional reserve banking poses a threat to the stability of market economies arguing on the affirmative for the affirmative on the resolution we have economist Robert Murphy Bob please come to the stage [Applause] opposing the resolution we have economist George Celgene George please come to the stage it is it is technically true that Jorge joined the Cato Institute a few years ago and Bob has been with the Mises Institute although he's done other things with his life too so it is sort of Mises again skater guys take a chair then we have a resolution called fractional reserve banking poses a threat to the stability of market economies Jane please close the voting Bob please take the podium and defend the resolution fractional reserve banking poses a threat to the stability of market economies take it away Bob thank you everyone for coming out I realized this dave was speaking here that I can now truthfully say that one time I played a club in New York City and Dave Smith open for me so I'm happy to be able to say that also I don't understand what the project for what it's worth I have plenty of small Mexican guys who love my work and they come up and it's never been confusing for me so David I should talk more all right the resolution tonight is a bit technical and I've been encouraged I'm gonna take some of my time in this opening statement to define some terms but I promise for those of you who are deep in this literature by the end of this you know I will give George chance to respond of course and will and I will address like his very subtle points but here I can't assume people know even some of these basic terms so let me define things from the start the first distinction we need to keep in mind is the difference between like the base money that whatever is serving is the actual money in the economy so in our economy of course that's dollar bills versus claims on the base money that commercial banks issue okay and what's going to end up being significant and this is the whole point of why fractional reserve banking is destabilizing or threatens financial stability is that in most day-to-day transactions those two things both can serve effectively as money that a merchant doesn't distinguish between someone if something cost ten dollars and you try to give them this they'll take it or if you have a debit card and swipe it and what that's of course saying is a commercial bank is telling the merchants no no we have $10 this this guy's good for it go ahead and sell them the thing for $10 or if you write a personal check historically commercial banks also issued pieces of paper that were claims like tickets issued by the bank that were called bank notes that was also effectively what it was was saying somebody who goes to the bank with this ticket is legally entitled to the underlying base money so again in our system it would be this back in the day it could be gold coins or silver coins now in that context then what do we mean by fractional reserve banking it's easier for say 100% reserve banking is saying if the commercial banks have issued claims legally binding claims saying the owners of these things we are promising on demand we will give you the underlying base money if they have those things a hundred percent stored in reserve so for all the claims in the community that the commercial banks have issued if they have the base money 100 percent backing it up then that of course is a hundred percent reserve banking in contrast fractional reserve banking means that the banks have issued more claims to money saying anybody who has this thing we promise you show up on demand we will give you money and yet they don't have a hundred percent of those in the vault they've issued more claims than they could actually back up if everyone happened to show up at the same time and this of course is what makes bank runs possible so make sure you understand under 100% reserve banking bank runs don't happen whereas it's fractional reserve banking by its very nature this is no matter how wise the banks investments have been that if the customers all show up at once and want to empty out their checking accounts the banks helpless again it's not a matter of the bank you know made bad investments it's just that's the nature of fraction reserve banking this is the famous scene you might remember the beginning of It's a Wonderful Life right Jimmy Stewart's behind the counter there's a panic in the community people show up and they want their money and what does Jimmy Stewart have to tell him he doesn't have it well I'm sorry I gave her money to Mary no I don't have it right in case you're curious yes the whole point of that was to do my impression so so--that's but again that is their it's because that's the nature of fractional reserve banking right that's what makes bank runs possible so keep that in mind now another distinction we should make is between fiat money versus commodity money so fiat money is you know tickets issued by typically we're talking about course of government's it's not backed up by anything and the money is only good to be money in contrast there's what's called commodity money like gold or silver coins for example where the gold and silver are also regular commodities but they also do double duty as a money in the economy and so those things that distinction between fiat and commodity is not the same thing is between 100 percent reserve in fractional reserve and so there's four logical possibilities I think it might clarify the debate tonight if I just walk through them really fast so you could have commodity money like gold or silver coins is the actual money in this community and the banks also have to keep 100% reserves so that kind of a system was the one that Murray Rothbard for example favored we could also imagine having our current system for example where there's fiat money and the banks are allowed to issue more claims on the fiat money than they have in the vault so there's fractional reserve banking that's our current system a lot of economists think that's fine like Paul Krugman for example right and then we have you can imagine when I think about that so and then we can also imagine that you could have commodity money like gold or silver coins is the actual money and yet the banks have to and the banks though are allowed to issue more claims on gold and silver than they have in the vault to back up so there's fractional reserve banking but commodity money so make sure you realize that's logically possible and in fact that's the system that like George sells you didn't Larry white talk about in their writings on this topic and then finally it's also logically possible that you could have a system that's got fiat money like you know dollar bills but yet the big commercial banks have to maintain 100% reserves or in practice they do maintain 100% reserves on that and actually believe it or not some economists are in favor of that so at Prescott recently I think was in 2016 for example had a paper so he's fine with having the dollar he doesn't think the gold standard is a good idea but he's fine with the dollar but he thinks commercial banks should keep wish you 100% reserves or should be held to that standard and why does he think that's as significant for tonight's debate because he's saying that it's it promotes stability a lot of economists in the wake of the Great Recession the financial crisis we're trying to say how can we promote stability and one thing that Prescott and other serious award-winning mainstream economists have been looking at is maybe we should stop letting banks do this thing where they issue more claims on money than they can possibly fulfill in case there's a crisis okay so the last sort of thing I want to just mention is a hundred percent reserve banking is possible all right a lot of people when when this topic comes up they scratch their even economists I've I've gotten this reaction they hear that somebody like Murray Rothbard is against fractional reserve banking and so they say well how could that even work I mean how does a bank is supposed to make money if it's not allowed to take your to you know pay you a low interest rate for your checking account deposit and lend it out to someone else at a higher rate and earn the spread if you don't let banks do that well then they would go out of business why would there be banks okay so that's not correct that that that objection so what banks do there's actually two distinct functions that banks serve one is to be like a storehouse or a warehouse for your money just in terms of convenience and safety right so that it's it's just more convenient for you instead of carrying around your cash on your person or in your vault at your house the bank has nice big vaults they have security guards they have ATM machines all over the world they've issued debit cards and they have you know deals with networks and so forth with restaurants and things it's just much more convenient for you whatever the base money is to be able to store these things called banks and then to be able to suspend it much more easily around the world and there it's safer to they you have to worry about a burglar taking all of your money and so that would be 100% reserves would apply to and that's fine and the banks would of course not be able to pay you interest on your checking account they would have to charge you somehow like me to be a slight fee every time you wrote a check or swipe your debit card there might be a tiny little fee just for them you know they're giving you a valuable service in a market economy if people want a service they pay for it and that's that that's fine the other distinct function that banks serve is to be a credit intermediary okay so you've got people over here who want to save maybe you got like a thousand people who want to save $200 each and then you got people over here who want to borrow maybe somebody wants to buy a house and they need a $200,000 mortgage in practice it would be hard for them all to negotiate a bunch of different deals for that and so the bank stands in between them the savers deal with the bank they lend their funds to the bank and then the bank lends it out and the bank has experts who can evaluate creditworthiness and so forth the bank's much better at evaluating credit risks and so that that's the service the bank is providing and it earns a spread there the crucial thing though is in that kind of scenario that these savers are genuinely giving up access to their money for the period of the loan so for example if you buy a CD a certificate of deposit from a bank maybe the deal says okay you you buy it for $100 today and then 12 months later they give you one hundred and three dollars back so during that year you're not walking around thinking you've got your hundred dollars in the bank and you can go spend it at the grocery store if you want to all right you you've lent it to the bank it's not yours until they pay you back with interest so that kind of thing that happens that's perfectly consistent with someone who wants to have a hundred percent reserve banking it's just checking accounts that were called demand deposits would be conceptually distinct from you could call them time deposits or savings accounts but the loans would be different from putting your money on deposit just for you to have them store it for you all right so that's fine so banking still works 100% reserves now let me talk about what what's what's the problem here okay so now we've set the table here so what is the problem why is fractional reserve banking inherently destabilizing let me just go do a historical thing cuz I think this is the the best way to start out and think it through and to see the essence of it and why it's inherently dubious and it distorts market economies and then as I say after George prefers you know what we'll get into the details of his world view so imagine historically the Goldsmith right back in the day this is loosely based obviously I'm cutting corners here but this is roughly consistent with what happened back in the day the Goldsmith's you know they're making jewelry they're making candlesticks they had a lot of gold on them they had vaults and so forth so the people in the community realized you know what instead of us storing our gold in our houses we'll give it to them and they'll keep it for us it's safer so they would do that maybe pay him a little fee and so the Goldsmith has issued tickets to the people in the community so let's just say they've given him a thousand ounces of gold that's in his vault and there's a thousand tickets now in the community saying if I present this to mr. Smith the goldsmith this gives me one ounce of gold now it would think about it it would be very cumbersome in practice if somebody had to buy two hundred ounces worth of goods for them to go of this Smith give him two two hundred tickets he gives them bags of a full two hundred ounces of gold that person makes the purchase then the seller walks over gives them the gold coins and gets the two hundred tickets back the buyer and seller if they both trust Smith realize that silly I'll just give you these tickets and then we don't have to walk back and forth and get the gold and put it back in and so it's a sufficient right it cuts down on the transaction time and so once the community starts doing that then Smith has an idea he realizes the community as they come to trust his tickets they don't feel the need to come in and redeem them very much and so just as long as anytime someone shows up with those tickets that he's issued he pays them off then the community trusts it and they start treating those tickets as if they're as good as gold they start functioning equivalently in terms of economically and so then Smith realized I got a thousand ounces of gold in the vault and on any given day at worst maybe thirty of them get taken out I got 970 sitting there and then it gets replenished and it bounces around but it never goes below 920 let's say and he realizes that's kind of wasteful she's sitting there doing nothing now what he could do is just be reckless and go buy 500 gold ounce was worth of stuff and splurge but then he would permanently be low in a case people wanted to redeem the tickets he'd be be out of luck so what he does is more clever is he instead creates let's say 200 more tickets and lends them out to a very credit worthy businessperson who has a project that's going to cost 200 ounces of gold and he charges let's say 20 sorry 10 percent interest so that person goes out does the project now there's going to be more ticket claims than than usual he once he does that but still maybe it'll go down to 700 that are sitting in his vault or what have you 800 but he's still fine he's not nowhere near being the position of not being able to redeem a ticket if someone presents it but notice the beauty of that technique as long as that person pays off the loan the next year what happens the person pays 220 tickets back right the 200 loan plus 20 and so then Smith what does he do he the 200 that he kind of created out of thin air he just rips them up and then the 20 left that were the interest on that loan those now point to coins in his vault that are his free and clear so he can take those 20 and do whatever he wants with it because now the community only has 980 tickets outstanding because 20 of them got paid to him as an interest payment now there was nothing coercive about the the interest and so forth right that merchant who borrowed the 200 he did something voluntary that the community valued and so that's how that person got the 200 back plus the 20 extra now what's the the problem is of course Smith likes that deal right he he effectively by just writing tickets out of thin air lending them out and then getting pay as long as he didn't make a stupid loan and got paid back then he gets access to some of the coins that were in his wallet the community had put there just because they didn't want to be carrying them around and so that what happened he you know he had to first build up the trust but once he had done that he's now able to earn interest off of tickets that he floats over and above coins that he can back up at any time so as long as he never gets caught with everybody panicking and turning all the tickets in he can keep doing that so why is this a problem well it goes back to the Austrian theory of the business cycle so here my time is limited so I'm gonna have to hopefully assume most of you are vaguely familiar with the Austrian theory that Mises and Hayek developed but that theory just to be clear does not blame the boom-bust unlike central banking know what that is the theory is based upon is the commercial banks ability to create money and expand credit and the crucial thing is think about the goldsmith he didn't create those 200 tickets and just distribute him randomly around the community so they just pushed up prices here and there what he specifically did the way that 200 extra ounces entered the economy was through the loan market he lends it into the economy and then when he absorbed the 200 and destroyed it it was pulling it back through the loan market from a loan being paid off so the first price that got distorted by that new money and then pulling it out was the interest rate the artificially low interest rate stimulates a boom which inevitably leads to a bust as Mises and Hayek say and that's why fractional reserve banking is inherently destabilizing Georg for the negative Georg salesmen please take the podium take it away Thank You Jean well you know after that opening comedy act I have a feeling that no matter how well I do at this debate the Cato Institute is just not going to be promoting that I do want to complain to start with have a complaint for Jean originally I thought I would have to say nice things about bankers for 12 minutes and that's pretty hard to do and now he tells me I have to come up with 15 minutes of nice things to say about bankers and I hope you'll agree that makes my challenge much harder than Bob's saying bad things for 15 minutes but I'm gonna do my best of course what I specifically have to say the nice thing I have to say is that fractional reserve banking does not pose a threat to market economies in fact I'm gonna argue that it's a very desirable market institution that's been made a scapegoat for other genuine threats now there are actually two kinds of threats fractional reserve banking is supposed to pose and Bob has alluded to both of them it's accused of causing systemic banking crises as a result of bank runs it's also accused of fueling unsustainable booms not based on people's voluntary savings I've got two about 12 minutes I think their team to counter both of those claims so let's start with banking crises this is the more popular concern of proponents of a hundred percent reserves meaning proponents who favor a Fiat hundred percent reserve system Chicago plan of the 1930s the sovereign money initiative of the Swiss in recent years the argument here goes as follows fractional reserve banks use deposits that can be cashed out by their claimants at anytime they used them to finance loans with definite terms and this mismatching of maturities with liabilities and assets makes the banks vulnerable inherently vulnerable to runs which are occasions again when everybody wants their money out at once and the banks of course can't possibly come up with it if they're only holding fractional reserves now I think even Bob would agree that as far as this arguments concerned isolated runs and bank failures are tolerable and I would say they're actually Sal salutary what badly managed banks lose better one's game because isolated runs people take their money out of certain banks but another some creditors may take losses but you haven't got a systemic crisis the problem is that bank runs are supposedly contagious panic spreads from bank to bank indiscriminately and there can be widespread bank failures resulting in a monetary contraction and then a recession or even a depression so what's wrong with this argument what's wrong with it is it's more myth than reality in fact there's surprisingly little empirical foundation for this scenario of banking crises the proponents of the scenario almost always involve give gave you a good example they mention the run in It's a Wonderful Life the folks that's a movie now and not only that it's a bad example because the the the the Biddle Savings and Loan are building and Loan Bailey sorry Bailey's building and Loan actually that run is started when Uncle Bill loses eight thousand bucks so that bank is actually very badly managed it probably deserves to fail no matter how much Jimmy Stewart pleads for it because eight thousand bucks was real money in 1945 anyway this run is not random its its depositors saying we hear that you guys have blown it and we want to cash out but a better example for the theory would be the bank run in Mary Poppins I don't know why this isn't more often as evidence for the proponents because there it's a pure rumor right the kid wants his tuppence and it it's actually nothing wrong with the fidelity fiduciary bank it's perfectly sound and yet there's a run that shuts it down well here's the thing real life bank runs are seldom unprovoked they're almost always runs that are in trouble on banks that are in trouble before hand that have been badly managed that their loans are not performing etc take the runs of the 1930s which are usually cited as kind of paradigm attic examples of unprovoked bank runs the vast majority of those runs were in response to genuine bad news often concerning rural banks in agricultural areas agriculture prices were falling throughout the 1920s and early 30s these banks were pre run insolvent is the technical term they're not being they're not failing because they're being run upon they're run upon because they're failing and the runs had the desirable effect of shutting the banks down quickly before they become can pile up losses and it caused even greater harm to their creditors in the 1930s also to pick that standard case bank run contagions panics spreading from bank to bank were rare and quite limited what appeared to be bank contagions started with the bank holiday declared by the governor of Nevada well holidays are contagious if you see a governor sunny shutting down all the banks in his state people in the next state are gonna wonder whether that governor is gonna do that too and that was what started some apparent contagion effects finally in 1933 as most people in here know there was a big run in February 33 continued until the National bank holiday declared by Roosevelt that was a run on the dollar sparked by rumors that FDR would devalue no monetary system that's on a gold standard can stand such rumors but it wasn't the banks that were distrusted it was the government's fidelity to the gold standard that was in question now if we look outside the US we see even more evidence against the notion that fractional reserve banking is inherently vulnerable to crises take Canada up north 1930s how many banks failed in Canada zero Canada was hit harder by the depression than the US was in most respects but had a sound banking system and because of that it had no bank failures there's no evidence of inherent vulnerability what's the difference between the US and Canada simple we had lousy Bank regulations in those days we had new lousy regulations now in those days we had unit banking no bank could have branches were very few so they were under diversified tiny under capitalized Canadian banks branch nationwide and we're big and had lots of capital they could withstand big shocks and they were diversified so the theory if you would look at other countries saying you get more evidence that there's plenty of sound banking systems out there fractional reserve they've never been any hundred percent reserve banking systems by the way that's something you should wonder about there's never been a law against it right like some of the laws some people would like to have against fractional reserves in any event but the theory doesn't fit inherent vulnerability doesn't fit there's an alternative theory that the US example points to but if you look at world evidence as I have you can see that it all fits banking crises are due to dumb banking regulations bad government regulations now I don't have time to elaborate but I oppose you this challenge I used to do it to my students you show me a bank in crisis I'll show you bad regulations not just fractional reserves takes more than that to cause a crisis so what's happened here what's happening here is fractional reserve banking is being made a scapegoat for wrongheaded banking regulations it's being blamed for what's not an inherent problem to it where regulations bad government regulations are the true cause and I can show you by for any evidence you name now let's talk about business cycles the charge here is that fractional reserve banks keenly engage in lending that's not financed by corresponding acts of Satan causing unsustainable malinvestment booms that's the Austrian theory now first of all I want to say that I'm not opposed to this theory and I agree that lending not backed by voluntary savings contributes to business cycles however I deny that fractional reserve banks routinely engaged in such lending now competitive banks in fact and we're talking about competitive commercial banks here not central banks those are an exception our seldom a source of lending in excess of voluntary savings I hope most of you will agree if not all of you then when people place funds with banks for definite terms and they know Bob agrees because he just practically made this argument say they buy a certificate of deposit or savings account where there's a term to the deposit that those people are engaged in voluntary savings making it okay for their banks and for the banking system to engage in the same amount of lending okay so what about demand deposits the difference here is not one in kind but one of degree funds placed in a demand deposit account and by the way this was true in the days of the Goldsmith's and even in the earliest beginnings of banking and I can go into the law on this if we bring it up in question time funds placing a demand deposit also still represent voluntary savings only these savings have no specific term they are so many call loans or demand loans a perfectly common thing in finance or have loans that are made with no specific term you can ask for the money back an overdraft account as a car loan securities markets banks make car loans to them all the time now banks aren't earning not lending on the basis of no voluntary savings they're lending on the basis of voluntary savings where they have to estimate to what extent for how long the savings are at their disposal notice this poses an extra challenge of course bankers have to guess how many savings are at the disposal and for how long many depositors helps of course because although some are taking money out the large numbers can usually result in offsetting deposits so the actual pool of savings that are available voluntary savings is more constant than the actions of individual pot depositors might suggest still of course it's true that bankers don't always guess right there's risk but that's why we have fractional reserve banks rather than zero reserve banks the reserves are there to provide a margin of error reasonably safe reserve ratios are determined by bankers through the experience just like capital ratios they learn what cushion they can get away with and over time that cushion changes according to experience in any event when a competitive bank overestimates the voluntary savings at its disposal that Bank discovers the error very quickly the reserve real losses there's not much scope therefore for systematic over-expansion lending beyond savings individual bank lends more than its customers are willing to provide it runs out of reserves so systematic over lending in the competitive system is very rare so why do we have boom bust cycles well we have them mostly because of central banks central bank's IOUs even under a gold standard tend to be used as reserves by other banks so those central banks aren't subject to the same discipline of competitive banks where their notes and checks are being returned actively so when a central bank expands instead it's like a Pied Piper for the whole system the other banks have more reserves so they expand as well but what has to drive this as a central bank so here again you have a case by the way I have a whole paper about it called bank lending manias in theory in history we look at the most famous lending booms and show that in every case it's not the reserve ratio falling it's money being created by central bank driving the whole system to expand with a fixed reserve ratio and this is another case where fractional reserve banking has been made a scapegoat real culprit has been central bank misconduct do you want to solve the problem don't throw up the fractional reserve baby get rid of the central bank bathwater the quick sides while fractional reserve banks aren't to blame for malinvestment they play a crucial role in avoiding under investment which happens if let when lending falls short of voluntary savings asked me during the question period and I'll elaborate now I want to add a couple points in the last minute or so on the positive role fractional reserve banks play that 100 percent reserve banks couldn't possibly play and by the way if you think those fees would be puny in the system that Bob was talking about where you still use debit cards etc but you don't have the bank isn't using your money you can forget about it you think your fees are lousy now wait till you see how much that cost that may have something to do with the fact that this alternative Bob brings up has never been popular historically even though it's always been legal even in the days before deposit insurance nobody wanted to that deal banks could have offered it what happened to the market if it's so good why didn't any banker ever think of offering this alternative system and advertising that the other banks were cheating anyway banks and economic development I don't want to come across as a fractional reserve Pollyanna even the best regulated fractional reserve system won't be trouble-free some banks will fail some creditors will occasionally lose money banks will take part in booms all these things are course less likely that with a hundred percent reserves but fractional reserve banking has one huge benefit that more than compensates for its cost which is the efficient employment of the public scarce savings I can't elaborate on this either in the time I have left 30 seconds I refer you to book 2 chapter 2 of The Wealth of Nations for an eloquent discussion by Adam Smith of how Scotland in the course of a hundred years from 1700 1800 went from being a poor country to being almost as rich in per capita terms as England all thanks or largely thanks and according to Smith and many others to its efficient free fractions our banking system so parting analogy if you don't mind it's easy to fix one for all if you ignore others but this is one of those cases where the fix is worse than the problem thank you very much [Applause] repot oil from Bob Murphy okay well one of George's points is easy to respond to he wondered why didn't bring up Mary Poppins because my impression of her is terrible so that's obvious all right now he asked now he mentioned some things that he said words the effect of Everett Lake looking for every crisis and by the way notice he start out by listing all the various economists who have proposed methods of limiting fractional reserve banking so this this isn't some crank idea that just Murray Rothbard and his followers are into there are plenty of mainstream with Chicago school guys and so forth who have dabbled with this because they they're noticing that there's inherent instability and there of course grappling with ways of trying to contain it but he said for every me no major problem they point to when apparently fractional reserve banking led to this huge disaster he can find other government regulations that were also there that contributed to it well I agree with that the only way we would know is if there were like in you know in the ancap world somewhere society that the only things they allowed fractional reserve banking him that would be the test case and then we could see once and for all whether it works now but in the historical record of course we're never going to see that exact experimental case and of course I agree that you know the laws were unit banking FDR you're threatening to devalue and then following through with it all those things of course those are destabilizing and that will make it worse so yes looking back through history the worst crises like the benchmark we used to say wow that was really an unstable economy for that period wasn't it the worst stuff that government all did put together is going to produce the worst results so of course looking back at what we think of as really bad messed up economies we're gonna say yeah there was more than just fractures or a banking going on but just think through what I said I mean that's obvious whatever the truth is of fractures our banking what I just said is gonna be the way history looks okay and so what we're debating though tonight is to say suppose we put those things aside is fracture reserve banking inherently unstable so let me just before I refer back to his specific points they just make my argument here again he agreed with the Austrian theory of the business cycle the essence of it right and so those who are familiar with it so again I'm going to repeat my claim that George didn't challenge the last one that the Austrian business cycle theory was not developed to explain how central bank's caused the boom-bust cycle it was explaining how the commercial banks expand credit through the loan market and that the if you're familiar with the term Cantillon effects that when new monetary inflation enters the economy it doesn't just cause a general price rise it hits specific sectors first and distorts relative prices and so the Austrian business cycle theory is just a particular application of that saying if the way the new money enters the economy is not from a helicopter drop but through the commercial banking system the first prices that it screws up are the interest rates and it lower interest rates give a false signal to entrepreneurs to start long-term projects that's why fractional reserve banking per se is inherently unstable so yes if that were the only thing and government didn't do anything else to screw up the economy I agree that would be less unstable than what we see in the real world when government does all that put together but still the essence of tonight what we're saying is fraction reserve banking per se is inherently unstable and so far George I think has has not challenged my claim that that's what Austrian business cycle theory is about now as far as I think the main thing that his alluding to it the remainder of my time here let me just focus it's a critical element in George's case here and by the way his argument is is is very elegant so if you haven't read the literature on this and since seen his argument very clever and it's a it's a beautiful idea I just think it happens to be wrong okay and what I want to say is he's saying oh no the one special case when fractional reserve banking doesn't cause the boom-bust cycle is if the community wants to hold more of these deposits under his free banking system the commercial banks only in create more money if you will and lend it out when the community wants to hold more and so he's saying that is genuine savings okay and well I want to just challenge it and say no it's not so there's two ways one is just the real quick glib way when he was saying look it's a spectrum it's a matter of degree you can have a one-year loan a six-month loan and basically when you put money in a checking account that's like a very short-term loan you just keep rolling over no that that's not the same thing look I could say man I had a bad job I went to the gym yesterday I was on there for 45 minutes and then later so you know what well next week you see me in a sink I was really bad last night I went to the gym I didn't stay very long at all they said how long do you say Oh zero minutes that's equivalent to saying I didn't go to the gym okay it's not that I went to the gym for a very short time once it's zero that's it when you give money into a checking account and it's your money he even said I remember he said those few you think the fees would be puny if the bank's not allowed to use your money that's the look at that was the words he said right that when you have money in a checking account you're walking around thinking you can spend that you're not relinquishing control that's the whole point of these whether called money substitutes right the commercial banks have issued claims on money that's circulate in the community they're as good as money and so that's why it's inherently destabilizing because it's not really you're not lending money to the bank thank you George George your final rebuttal bob keeps mentioning all the economists who favor a hundred percent reserves and there are a fair number there are a lot more who don't favor a hundred percent reserves let's not forget that the vast majority and I've looked at all of these he cooked these arguments from the various schools not just the Austrian schools and one thing they all have in common was that remarkable lack of historical evidence and awareness I'm afraid in most cases they just don't look at very many countries and they look at the u.s. badly that is they don't really study carefully what actually happened even here we do have plenty of evidence look there are no pristine unregulated banking systems but we can see patterns in different countries at different times of where the crises happen what kinds of regulations they have and I've done a study of this a couple studies actually and it's overwhelmingly clear that the least regulated banking systems of the past including ones without central banks particularly performed very well and forests of the frequency of crises the u.s. just happens to be a particularly bad case it leads the race of those countries that have been studied in frequency of crises and in bad back banking regulations gone all the way back now Bob mentioned the can't alone effects well if you want to blame something for Cantillon effects you should start with gold since that's was a case study that Cantillon actually originally emphasized there was a discovery of gold and how it pours into the monetary system and effects relative prices and so on I'm not making an argument against gold I'm just saying that Cantillon himself didn't particularly single out fractional reserve banks I would like to say something in this matter of degree versus it's a difference in kind a call loan is a call loan for as long as it lasts collectively all of us leave money in our deposits sometimes for a long time not sometimes for not very long with the pooling of large numbers of such deposits and the constant inflow and outflow bankers can reasonably assume they have a certain amount that's available to them for a fairly long time and can make loans and do this routinely as for it being in any way contrary to the rights of contractual agreements there's no truth to that at all even in the days of the Goldsmith's and I can refer you to an article I've written called those dishonest Goldsmith's publishing in the financial history review all about the origins of fractional reserve banking could not I could not find any trace of evidence of there being anything dishonest look there's an old legal rule that goes back to ancient times it's older than Goldsmith banking which gets started in this is 17th century and it goes back to Judaic law and for all I know it's older than that I've called it the bagging rule it's a very simple principle if you brought money to a money changer and later to a goldsmith and it was in a sealed container the understanding was that the coins in the sealed container were still your property and you were putting it there for storage if you brought loose coins the presumption was that you were making they became the property of the banker there were good reasons legally for this having to do with the lack of earmarking of coins but the old from ancient times was understood the coins the ownership went with possession unlike with most goods and this was a very very old legal doctrine and by the time of the Goldsmith's everyone understood if you didn't put it in a bag and you didn't say otherwise you're making a loan to the banker you're not making a bailment deposit in the strict sense the money belongs to the banker what you own is a claim that gives you the right to have it back when you asked for it and by the way that's the only reasonable legal claim you could have because otherwise strictly speaking with a bailment this banker would have to surrender the particular coins and that's where I they would have to be in a sealed container this was all long-established law by the time the old first fractional reserve banks got started fraud had nothing to do with it nothing it's a complete myth that belongs in bad undergraduate textbooks so so and we should stop repeating it because there's not an ounce of truth to it that's really all I have to say about about those points we have the history we have the reality of the law and we have the theory that doesn't say that any fractional reserve bank lending is going to cause a business cycle it says only that lending that's not based on savings which a competitive bank can hardly get away with is going to contribute to business cycles that's why empirically central banks turn out to be the true culprits [Applause] thank you guys due to extremely worthy opponents as I'm sure you both agree vigorous vigorous people debating each other this evening you want to line up at the mic over there to give us your questions first I want to ask either side George do you want to put a question to Bob now Bob do you want a question put a question to George would you want to wait for the audience huh guys but I'd waive it I would maybe wait in case the audience doesn't asks the really zingers okay George you want but George you have a right yeah he's pick up the mic he wanted to sing God you have that mic why are you letting up I want a lob a couple of questions that at both of you George you you conceded that as far as the argument goes in a way 100 percent backing is a little bit more stable but then you had a bad only a very short time to say ah but there's something else and and as far as I gathered you seem to say well it's cheaper it's more efficient but could you elaborate on what you mean but what is the advantage affections that minimizes instability could you write so fraction fractional reserve banking does have costs it does mean in Adam Smith recognizes - it does mean that banks will be more vulnerable to failure right and people will occasionally even creditors will lose money if the if the capital isn't there although when we didn't have Deposit Insurance with 25 percent capital ratios for banks as a protection against that but bad things will happen but it's the the counterpart the reason why it's worth it miss Smith argued and many others since is that you're taking a large sum of savings that are actually there that our little driblets here there and everywhere and you're accumulating them and investing them productively that's what the Scottish banks did that's what fractional reserve banks generally do sometimes well sometimes not so well and that adds up to a lot more economic growth and development and that of course is a very important Rondo Cameron an economic historian late economic historian from university of from emory wrote two books all about this banking and there in the and industrialization and banking and economic development he and his co-authors surveyed all the history of all the industrialized nations in one book and then the history of many unand us realized ones and the other asking what banking did or didn't do in the answer that came out of this was the freest banking systems contributed to industrialization in countries that suppressed their banks which meant in practice fractional reserve banks did not industrialize banking played a crucial role although the wealth were used to today banking fractional reserve banking because there has never been any other kind with rare exceptions all state-sponsored by the way is what made it possible for the industrialized countries to get that way that's no small thing i do you want to comment on george's answer well sure if he just parse what he just said he said okay the you know the historian they look and see that those country the governments that didn't mess with the banks and just let him do what they wanted to they would they grew whereas the ones that regulated worked and then he added in a second by the way there's never been 100% reserve banking so that proves that these governments that were intervening in their banking sector it wasn't to enforce 100 percent reserves so yeah i have no problem with the argument or the claim historically if you look at states that interfere with their banks they tend to grow less than states that you know i'm not for regulating by the way i am not for the government even if somebody releases chemical gas i don't want the government punishing that I'm certainly not gonna say punish them for issuing fraction reserve banking so this is not an argument about political crackdowns on banks we're talking about the economic so that's what I'm doing tonight my question you Bob is in terms of this idea about the demand deposits and savings if if there is complete transparency which I think you still if indeed everybody says all banks say you're depositing this money and we have a great presentation from Bob Murphy from the Seoul forum and exactly what this means with that there's going to be fraction reserve banking this is what it means there's the risks you value sign document you understand the risk what do you choose and then let's say everybody choose factions are bragging cuz it's cheaper the cheaper alternative so what would you say that that's sort of like an affirmative action to say well okay I'm saving I'll leave it's like a coal loan would you would you concede that argument or what would be your pushback about that okay so let me clarify George set up there he said winners were the last remarks let's stop repeating the claim that this is fraud I didn't say it was fraud okay so I guess other people who have my side on this they do make that argument I'm not saying it's fraud alright what I'm saying is economically so yes I'm saying economically when you have money in a checking account you don't view that is that you're lending money to the bank you still think you can spend that money it's serving the same function to you as if you kept cash in your purse or your wallet and that's why the merchants in the community I mean that's why we're not worried about bonds right because you can't go to the store and buy something with bonds typically but you can spend them with claims on money issued by banks that's the whole reason Mises developed his theory of what he called money substitutes and so forth was that claims on banks that are considered perfectly legitimate and no doubt then the community treats them is equivalent to money so that's the problem what if everybody listened to Scylla forum debate Celgene concedes there are risks involved you tell people look this money may not be there you know whatever you want to say so they say well I want to do it anyway so there's no complete transparency when would you say that that then they're saving the money in a sense when they say well I understand the risk I would rather just have the fraction rather than on to present because the fraction is cheaper well what would you would you agree that that's that would be savings if there's complete transparency and then the monies that may not be there no okay so the the problem is so no I don't think so because there's - there's now two sets of people walking around having access to the same savings and so that that economically that they can't you're you're having the benefits of command over present goods you could spend it if you wanted to and yet you've effectively lent the money out so no I don't think it's the same thing I said first question please phrase your creditors your question as a question and tell us who you might be addressing it to if anybody thank you thank you both for coming out tonight intimating actually you guys answered my question in the last minute or so so stove more lighthearted question for dr. Murphy in your book choice you mentioned different groups or different people minting gold coins and one of them was actually the Celgene mint is that referring to you're debating a point opponent tonight yeah okay no I do think that Celgene is mint but yeah that was an homage I saw him give a talk at the Mises Institute on the the history of private coinage so yes that the the mark the market can produce money it can produce banking services that you don't need the government to be involved in money in banking at all so yes that was an homage to the talk I saw him give about how beautiful the coins were that private mints produced okay let's not give nice guys let's sell it next question please questions for both is there a qualitative difference between fractional reserve banking and say someone like myself counterfeiting money and then lending it yes there is because there's no there's no illegal activity involved in fractional reserve banking the bank is make is taking in credit in the form of car loans that are made to it it's an intermediary as we say and it is turning around and on behalf of the people lending to it it is making loans to others and as soon as the lending to it ceases that is the end of the availability of credit to the bank and as to curtail its own loans accordingly and this is exactly what goes on in competitive banking systems they lend as much as they can lend because the money is at their disposal though no one has made a specific agreement that's regarding how long and then they have to estimate that but they're not blending anything that doesn't that's illegitimate they're not creating claims that are different in kind from the kinds of claims they create when they deal with term deposits the only difference is they have to speculate less with terms deposits it's not as tricky but large numbers of independent depositors make it not so difficult to be a fractional reserve bank or and be prudent about it once you introduce deposit insurance indeed then you start having a lot less prudence because the depositors themselves are less picky about where they put their money that's when things really go south coming father well well notice I mean George went right to the legality of it and so that I think that is a hint here that there is that your question was clothed the nature of what's happening there so I yes I would say if you understood why just you being able to print up hundred-dollar bills but but it's not it's not just the fact that that's inflationary it's if you lent them out that that's really the issue so be to be clear I am NOT talking about the fraudulent even though there are people who make those claims with the bailment contracts there is that literature that's not what I'm here saying I'm saying that if the money enters through the loan market those prices get pushed down first and those are not the correct prices that the community has not saved more just because the banks decide to issue more tickets Oh next question hi there this question is more for Bob but I would love if both of you guys wanted to weigh on this it seems to me that the crux of this issue it really boils down to the inflationary does inflationary pressure inflationary activity lead to a boom and then a bust and that can be through a central bank it can be through fractional reserve and it seems like there's a bit of a debate in that point whether a fractional reserve does in fact inflate or not in my opinion it seems clear it does and so my question really is what is it about the inflationary behavior that leads to malinvestment the boom well the boom I understand but then the eventual bust why why does that inflation be fiat fractional reserve or in central bank whatever lead to malinvestment and then and then a bust okay Bob check it but I want you to respond to George okay so yes I and I believe in you know George's framer he call inside money so I don't think he's gonna deny that there's a sense in which banks create money when he's gonna say under his scenario it's not destabilizing so from my perspective again if the problem is you need to know what interest rates do they if the community genuinely saves and refrains from consumption that frees up resources then if it goes through the loan market lower interest rates tell entrepreneurs oh there's more real savings to invest in longer-term projects so if the community hasn't refrained from consumption and the reason more loans are available is because now the banks are issuing more claims then that price is wrong that's why if it enters through the so it's not inflation per se that we're talking about tonight it's that if inflation comes through the loan market and just the nature of fracture reserve banking when banks create money in a certain sense that's how the new money enters the economy is through a loan I just want to elaborate on the question of fractional reserves and inflation it's just not true that fractional reserve banking involves a higher inflation rate generally if you have a system with the ten percent reserve just to speak of that case and another with a hundred percent reserve and let's say gold is flowing into each system at the rate of five percent per year and there's no changes in overall than people's demand for money and I suppose it's constant the price the inflation rate will be an output is constant the inflation rate will be five percent in the 100 percent reserve system and it will be five percent in the ten percent reserve system the reserve ratio doesn't tell you about the rate of growth of the money supply being any different once you've settled into that reserve ratio it's not great if you're growing a reserve fractional reserve system out of nothing then you have a one time increase in the price level we have a question that came in from the from the virtual space inevitably we can't talk about money and Becky with that quote talking about Bitcoin and so one of the questions of course that came in is could Bitcoin or any other cryptocurrency be some kind of base money as gold once was could Bitcoin become some kind of base money as gold once was somewhat relevant to the debate could both of you respond to it well Bitcoin if it where money would be based money it's it's not a claim or an I or you which is what inside money to use the expression Bob use is so the Bitcoin can't be anything but a base money if it's money at all right whether it's money it all depends on how widely used it is is that medium exchange so then the question that grows out of that is can you have a fractional reserve banking system develop on top of a Bitcoin standard and the answer is in principle you can whether the regulators would ever allow such a thing of course I doubt it very much any comment well sure so yeah like George said I mean in the Austrian monetary framework bitcoins clearly a medium of exchange but is it's not it's not universally accepted so I would say technically it's not money right now but in principle if everybody embraced it and used it then it could be a money at that point the the narrow point just for the the Chu purists in the room were familiar this literally very quickly say about that is all of the things that George talks about the benefits of having like a flexible or expansionary currency that you have with fractional reserve banking in principle if you had a crypto currency that was tied to like maintaining a certain you know price level of a basket of commodities or whatever you could theoretically imagine that sort of framework and that new money would not need to enter the economy through the loan sector so I think all the problems with you know sticky prices and the alleged benefits of FRB just as a counter example just imagine a world where the crypto currency comes in and just you know regulates the price level so if there's a deflationary shock or inflationary the quantity of base money expands or contracts and that doesn't have the alleged problems of gold so I'm just saying conceptually that's not I'm favoring it but think through the logic of that if you're really hip deep in this literature to see his claims about FRB actually don't work or you don't need them because you can imagine that logical fractional reserve banking there are actually two separate issues here one is whether the money supply is a whole adjusts in a way that avoids problems of severe deflation that sort of thing and and that is ultimately that's ultimately a challenge of getting your base money right you know you either have to rely on a very competent and perhaps omniscient central banker or you better pick the right commodity or come up with a clever cryptocurrency that that's smart macroeconomic terms that's different from the Adam Smith point which is about being not squandering resources on your money supply unnecessarily so gold is very expensive and as many of you know cryptocurrency is also very expensive stuff it's a high cost of production and the coins are worth exactly the energy that goes into them in the in equilibrium so it's expensive what Smith is talking about is the social savings I know that sounds communist but that means the savings to society alright don't get old there's no issed there the that's a savings to society of making a little gold go a lot further in having a money supply that's ten percent gold and and and ninety percent credit versus a hundred percent gold it's very expensive to have a hundred percent money supply and this is not inconsistent what Smith's is favoring is totally consistent with having a the the lending that's going on behind a fractional reserve system be a perfect mirror image of people's willingness to hold IO use instead of base money so you hold IO use your willingness to do that for any length of time supply savings to the banks they can lend and in turn you get a money supply that's a lot cheaper in real resource costs and society can use those savings to invest more and produce more that's separate from the behavior of the price level and all that okay yeah so just to make sure you got what he was saying Smith's argument was that it would be wasteful to have to like dig up all these gold coins what if instead we could have just 10% the gold coins and the 90% of the money being claims golde then that 90% of the gold's not sitting uselessly in vaults it's freed up I'll return to that point in my in my closing remarks but let me just mention that you know that that is a distinct point so that's one possible downside of fractional reserve banking in terms sorry 100% reserve banking is that perhaps there's this fixed overhead and what I would say it worse that's that's analogous to saying well you know it's really expensive that people have to put locks on doors and if we could just free up those resources but given the way the reality is that putting those locks that's that's optimal right now and we can imagine a different world so I would say you know that's that's what I'll say here I'll come back to that point and then the closing as well next question thanks so much for the debate given that I know this is more of a macroeconomic expediency debate rather than a fraud legal debate but given that the most natural and intuitive understanding of a banknote is under 100% fractional reserve banking what is the contractual nature of a banknote under fractional reserve banking and also if you have a system with fractional and 100 reserve banking in a free market simultaneously aren't those contracts different in nature and also the same question about different percentages of fractions in fractional reserve a banknote is and always has been an IOU it's a debt instrument I have a little article I have a blog sort of a blog so our essay on called Ultimates from it's it's Cato so make what you will of that but but but it's it's called bank notes never aren't and never have been bailment instruments and it shows a bunch of old bank notes commercial bank notes and then it shows a bunch of bailment certificates and you can see the language is completely different completely different a bailment certificate always says we have on deposits this stuff for you a bank note says we will pay this note on demand for X dollars so that's what they are that's what bank notes evolved they've never been tickets they've never been property certificates as the some of the literature from the Austrian says all of that is just not true of what banknotes ever have been so that's their legal foundation they're an IOU they're more like a little bearer bond the circulating bearer bond with a call option a put option by Department and and and that's the legal foundation the money that you surrendered when you took the banknote or a deposit credit balance became instantly the bankers property to do whatever the banker wanted but the banker had an obligation to come up with a certain amount of money when you came to ask for it which could be that very day and if the banker didn't meet that obligation the banker was in default with severe repercussions so that's the legal foundation yeah I mean I'm not sure so again I want to be clear I don't want people to confuse this is that I am NOT here arguing from legality or saying there's fraud going on I'm speaking economic let me just try this analogy maybe this will help imagine economists watching someone at a restaurant the guy goes into the restaurant he takes his coat off he hands it over the counter he gets a piece of paper he goes and eats his meal for an hour comes back gives a piece of paper and gets his coat back if we as economists said huh he lent his coat to the restaurant for one hour and then he gave him two dollars so there must have been a negative interest rate this is interesting right we would be misunderstanding what happened he wasn't lending the restaurant his coat he was just saying it would be inconvenient for me to carry my coat around and have it with me while I eat so I'll let them hang on to it I still have all the advantages of having instant access to my coat if I want it likewise when you make a deposit into your checking account and the fat it's crucial to the argument that those balances the claims on the bank circulate in the community effectively as money and so that's how you're actually not giving up anything you're not suffering the you know it all why are you putting in a checking account rather than buying a 12 month CD because you're thinking I might want to spend this tomorrow and so it's serving economically the same function as money in your wallet so long as they don't default on it or you know say you can't redeem it and so that's why it's theirs problem again that's the whole reason Mises developed this distinction he had money substitutes then what he called fiduciary media and money certificates that's why he developed it because he said there's something peculiar here when the community begins accepting these claims to be basically as good as money that that's that opens up Pandora's box Jesus didn't didn't have room in his classification for for callable loans obviously because that's what that's what the debate here is about is the legitimacy of deposits that are that are that that are basically just call them alone without a term anyway that's not what I wanted to say I wanted to say something more about banknotes because it's germane to the question of a hundred percent versus fractional banking until relatively recent times banknotes circulating IOUs where the more common form of bank liability whereas deposits that were checkable they were used by well-to-do people for fairly large transactions but the common people were more likely to deal with a bank by holding its paper io u--'s you cannot have circulating paper IR used at least not with any technology that has been had been extant in the past with a hundred percent reserve backing and that's because the ownership in order if the ownership is changing all the time that is the person holding the note who owns the gold because now we're talking about a certificate not an IOU that person is changing anonymously the bank can't send a bill to the person whose gold is being stored and therefore cannot charge for the service unless some sucker wants to pay perpetually for gold that he's passed their certificate on to somewhere else so the whole idea of circulating banknotes in a hundred percent reserve system is a non-starter it never would have worked you could only have deposits where people could transfer the deposit balances but there could be no circulating notes next question my questions for George if we were to have a nurses standardization rather then a let's say a legality form of banking would that not create more of a natural cycle to put the proper amount of capital in the system so like if you have 100 percent reserve of what I deposit in the bank then all my transactions are like 6% whereas if I have 20 percent that the banks allow to loan out and then I'm allowed to do all of my transactions through the bank at 0% with that not create more of a natural sliding scale I mean I go to the store and I buy shower curtains and there's 12 and I buy a curtain and there's 12 holes and I buy a rod and they all fit together would that not naturally happen in a situation like that and create the proper ironic credit could you explain the question as you understand it George and I'm not sure I fully understand that I think thing what you want to respond to well what part do you want I think the question is why don't the bank's just say look we have 10% reserve accounts 50% reserve accounts and so on and you pick it and it's all specified like that right and in the the answer is that the reason bank reserve ratios have to be able to fluctuate for fractional reserve banking to work well because there are unpredictable changes the bank bank cannot conveniently predict and state a fixed reserve ratio without putting itself in the position where it can't use the reserves when it needs to we have to we shouldn't be speculating about what the martin and this is the bigger answer your question why are we speculating about what bankers might do might offer to their customers when we've had now three four centuries of banks in many places offering different products they've discovered they discovered fractional reserves they discovered how to administer them and for the most part though we know all the horror stories and in some places much more obviously this system worked very well for many many many people bad banking systems have always existed I'm afraid there are more of them now than ever but we can trace that to the pernicious interventions of government adulterating what was Ottawa otherwise be a very satisfactory market product to pick up my question George have you said I think you've gone directly saying that Scotland actually practice something like 5% backing in 18 in the 1820s already Scottish banks generally kept specie reserves of more like 1% 1 to 2% with second day reserves in the form of Exchequer bills that could be easily cashed in London and this was a result of experience and they had almost a century of very very stable and productive banking and a Scotsman who got hold of a gold Guinea couldn't wait to trade it for a good Scottish banknote they wanted nothing to do with those clunky old coins do you do you think that that what would happen we'd have like 1% with them well I don't know what would happen now but but the past speaks very clearly on the potential for a fractional reserve banks when they're properly regulated and structured to get by with very low reserves and yet be incredibly safe and solid Canada is another very good example of that again about a from 1872 depending you run you want to cut it off 1935 or World War one very very stable banking system with with more goat role for government than Scotland but still relatively little government intervention common popular I just asked for a point I've heard claims that the Scottish banks suspended specie Redemption for like 23 years or something do you agree with that or yes they did what happened was something called the Napoleonic Wars Wars do have a way of disrupting things including all kinds of things that normally would work differently and what happened was in 1797 England went off the gold standard and of course Scotland was basically as very small the economy very heavily involved in trade with England and it just didn't make any sense for the Scottish banks to to retain the gold standard while the rest of the British Isles went off so they suspended in sympathy and probably more or less illegally for the only time but their customers did not mind and were rather relieved actually believe it or not all accounts suggested the English people were very glad when the the English bank suspended because they were very fearful of what was going to happen to the banking system otherwise so yes this is you know an example though of a force majeure which is something that can upset insurance contracts all kinds of normal market arrangements get made topsy-turvy we shouldn't expect any market institution to be able to hold out under all circumstances next question hi my question is for dr. Murphy there seems to be a tendency for both the debaters to agree that there is a tendency towards fractional reserve banking in a free society so my question is in a stateless society how would you enforce a hundred percent reserves this is gonna have to be the last question because we're running out of time object okay let me my position that I'm taking for this debate is actually the one that Mises takes in human act and I think this will clarify so I'm I'm okay with being for free banking I don't want political interferes with the banks I just think under genuine open competition in markets property rights and so forth that you know the private courts would enforce banks would be lent you know the same sort of mechanism and considerations that George and Larry White talked about and some of their work I think we just hold them much closer hun percent reserve much higher than the one to three percent that he said he was okay with we have skirted around the legal question and I think that that's fine I appreciate actually the fact that bob has not been pressing the league argument and my only reason for bringing up the Goldsmith's was because he did sort of repeat that history that you often hear where they first were taking stuff and storing it and then they started issuing more tickets and so on I merely wish to say that's not what actually happened in England at that time but to close up to wrap up I think we have to be more conscious of of the the distorted view we have of banking which has become more or less a an account of all the disasters that have happened in banking both in our own law lifetimes and disasters we've heard about in the past this is a looking at the industry move through a distorted lens what people don't realize sometimes because this doesn't make the newspapers is the long history of successful stable fractional reserve banking systems and unfortunately because governments have become more and more aggressive in their interventions and regulations we are less and less familiar with the potential for stable fractional reserve banking all the time and it's very sad to find my myself debating what feels like a dying institution for which I have very positive feelings generally but the real bottom line here that I'd like to stress is this is an activity that consenting adults have agreed to engage in for hundreds of years that has and that we know can produce desirable results that does not necessarily result in business cycles and indeed doesn't contribute at all the business cycles as long as we allow bankers to compete with one another aggressively and check each other's expansion as they will do in a competitive system we should not blame fractional reserve banking for problems in the past or in the future that are properly attributable not to that institution itself but to the interventions of governments especially through central banking and through other unwise banking regulations and I feel that all the advocate of 100% reserve banking have simply got it wrong they have taken an institution that is itself not unsound and that does a lot of good and they have attributed it they have blamed it for problems that it is not really to blame for it's rather as if we decided that there were too many traffic accidents on certain roads and decided to ban automobiles without recognizing that the problem was the design of those roads or perhaps faulty automobiles we have to decide whether the institution itself is fundamentally unsound and I think that the answer is it is not unsound the historical facts will simply not bear up the support the argument that there's an inherent problem of instability in fractional reserve banks Thanks [Applause] George is very confident when he makes assertions about the historical record let me just point out two things that were incredible admissions that came from it just to say that you shouldn't just the fact that he's very suave and confident does not mean that his statements about history are accurate it just is a general rule especially if you're in a club in New York City and someone says something you and he's suave and confident be very afraid okay he he said they're here so for the of course these are callable loans of course these are this is a standard this goes back hundreds of years and then he said it is an offhand remark to me well of course Mises didn't call it that because he didn't have the terminology available to him okay so I'm not saying there was a necessarily contradiction there but you see that the way he's now describing it and saying this is what everyone knew for hundreds of years apparently as of 1949 Mises didn't have that terminology available to him because that practice hadn't developed fully so I'm just saying that right there there's there's some problem but of course the humongous one he's sitting here telling us the whole debate how great the Scottish system was I mean Adam Smith knows it you know what I know what Bob Dole knows it everybody knows how awesome the Scottish banking system was and I asked him yeah I heard it was X I looked up the date it was from 1797 to 1821 those are years or I'm not talking about like at this time of day and then next Tuesday it was from the year 1797 to 1821 that the Scottish banks didn't redeem in specie and he said oh yeah that's true and then he's lecturing and saying how come they haven't offered these things well of course if they're allowed to go more than two decades without redeeming it you'd be a sucker if you were Bank playing by the rules and not doing that and he even was saying yeah probably wasn't even illegal and then he's a believe it or not their customers were relieved I don't believe it alright so that no I don't think that the customers were relieved that these claims that they said you're allowed to get gold and let banks said no you can't come back in 25 years and maybe we'll get some gold coin I don't think people saying thank God I can't go to the bank and get my coins back what a relief so we're bad enough that friend she's gonna just shoot me with his uh you know troops that's Napoleon reference listen because he was French alright do I need to talk about little Mexicans is that what we need for that is that what this is okay so now let me mention he said that the free banking does not encourage the boom-bust cycle let me just this is from an expert in the free banking literature so I agree with the claim that a system of free banking does not lead to the boom-bust cycle the way that like ludwig von Mises and Friedrich Hayek developed but this is but the reason is it contains it okay so this expert from the free banking literature is quoting Mises from human action who said issuance of fiduciary media and fiduciary media are you know bank claims on money the banks issue that are above the hundred percent reserves so that that's what we mean by fracture reserve banking issuance of fiduciary media no matter what its quantity may be always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle okay so that's Mises real flowery language and you know but missus is saying any amount of issuance when banks issue claims to money above and beyond what they have on reserve sets in motion the the boom-bust cycles he's described it the next page now I'm still reading from this writer this expert in the free banking literature said indeed Mises support for free banking is based in part on his agreement with this other economists who believe that freedom of note issue would automatically lead to 100% reserve banking okay so there's this this is expert is establishing that yes Mises was for free banking and he thought that would contain the business cycle but because mark genuine market forces would keep banks from keep from having very low reserve ratios that the reserve ratios will be pushed towards 100% reserves this author I'm quoting from as you may have guessed is Georg Celgene okay so this is not in dispute Georg and I both agree that Mises who developed the Austrian theory of the business cycle of course was saying that fractional reserve banking is that this is the problem here okay so I'm not I'm not appealing to Authority per se although it doesn't help that Mises agrees with me on this but what I'm saying is be clear if you have thought you liked the Austrian theory of the business cycle and you said yeah there is something there about when something happens and I think artificially low interest rate that the people who develop that theory what they had in mind was the banks commercial banks expanding credit and contracting it interest rates go low unsustainable boom there's a problem they sucked the credit out interest rates shoot up and that's the crash all right so it was developed in the context of the banking system now I think George never really disputed that per se his only real claim was to say no no trust me historically when we look back and look at the freest most unregulated systems there's no problems ok and so again but notice he would if I hadn't brought it up I don't think you would have walked out of here knowing that the Scottish banks the prime example suspended specie payments for over 20 years ok and so yes that's explains why you don't see a hard percent reserve banking and it shows you that there are crises that's inherently destabilizing the results are as follows bob was say it was it was arguing in favor of the resolution the resolution gotta got a yes vote of 46 percent initially which rose to 55 percent Bob picked up 9.4% points that's the number to beat George started from the basement at at a little under 15 percentage points he went up to 20 a little over 29 percentage points so so George picked up nearly 15 percentage points of George gets the tootsie roll he went went up 50 percentage points to John to boat to Bob's nine percentage points very close but George gets the touchy well you

Channel: ReasonTV

Views: 23,478

Rating: 4.8877978 out of 5

Keywords: libertarian, Reason magazine, reason.com, reason.tv, reasontv

Id: UDLCa7maGZA

Length: 84min 52sec (5092 seconds)

Published: Fri Apr 27 2018

Reddit Comments

[u/Calv1n321]

I love murphy. I thought he nailed this. Didn't overstate his case but won, IMO.

[u/Austro-Punk]

I don't dislike Murphy. But I don't think his argumentation is very good here. I posted their recent Twitter debate here.