What do those old debates between the Currency School and the Banking School have to do with us today? Plenty, says Matt McCaffrey. They show a path forward and illustrate the practical and theoretical roadblocks. FULL ARTICLE by Matt McCaffrey
Source link: http://blog.mises.org/13832/currency-and-banking-reform-in-19th-century-britain/
Currency and Banking Reform in 19th-Century Britain
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This treatment omits even more important topic of central bank. Peel’s act of 1844 represents decisive victory BOTH of those who held fractional reserves (in case of notes) to be responsible for business cycle and those who defended central bank. Yet it is quite possible to advocate full reserves without central bank (Mises’ initial position; lots of current Austrians would agree, for example de Soto). On the other hand the tenets of banking school (all the machinery of reflux mechanism) may be used to advance either central bank (since fractional reserves are said to be harmless) or (as modern free banking school does) to criticize central bank by showing terrible consequences of its meddling into the matters of commercial banks.
Thus it is quite mistaken to praise currency school and to criticize banking one without lots of qualifications. Such a narrative would leave out many important pieces of puzzle. With its help too many modern Austrians ignore the necessity of proper theory of fractional reserve banking. However we cannot forever condemn fractional reserves on ethical grounds. What if voluntary decisions really led to such state of affairs? Rothbard, Hoppe and others are rather unconvincing here. On the other hand modern free banking school is immersed in “macro reasoning” (stabilization of MV according to Selgin for example) incompatible with methodological individualism. As it seems some serious work has to be done here. Certainly the very first step is to dismantle aforementioned currency and banking school distinction, the matter was much more complicated.
Matt:
“the conclusion of the Banking School was that neither notes nor deposits should be subject to any restriction other than convertibility into specie. Any additional restrictions would hamper the ability of the banks to expand credit to meet an increase in demands of business.”
As long as the issuing bank has enough assets to always be able to maintain convertibility at, say, .25 oz of gold per pound, then the Banking position makes perfect sense. Such a bank will always be able to redeem its pounds, either for .25 oz of gold, or for other assets with a market value of .25 oz.
The banking school was correct, and I might add that the banking school members had more of a right to call themselves libertarians than Mises did, since Mises advocated the very restrictions on banking that they opposed.
Theft is also “restricted” on the market. It does not thereby follow that someone who argues it ought not to be restricted is more libertarian. That isn’t to say I think there is a good case for banking restrictions, but for many libertarians the case against FRB (if this is what you mean) is predicated on it being fraudulent. The only question is whether or not they’re right in it being an instance of fraud, not whose libertarian epeen is bigger…
A thief takes someone’s property against his will. A banker does not. Fractional reserve bankers, as long as they tell people that they are fractional reserve bankers, commit neither theft nor fraud.
I don’t disagree, I am just saying it’s not a question of how libertarian one is but whether it is in fact fraud or not.
You should criticize Rothbard, not Mises, for the latter was convinced that full reserves would arise from pure market order (at least in his Theorie des Geldes).
The position of banking school is rather peculiar, in certain sense even post-keynesian. The “demands of business” can be met if and only if the banks can amass enough bullion. Increased demand for loans hardly ensures the willingness of the depositors to enable such an expansionist policy.
If banks need bullion, they can buy it or borrow it. Depositors are just one source. If the public needs more money in order to conduct business, then money can come from many sources: Bullion can be stamped into coins, foreign money (paper, coins, etc.) can be imported, new forms of money (e.g. credit cards) can be created.
Rothbard and Mises both deserve criticism for attacking fractional reserve banking.
Well, the word “depositors” was meant to denote anyone depositing money (coins, bricks or paper – being convertible to metal) without any regard to domicile. Thus your answer does not answer my objection at all.
It is rather obvious fact that bank can expand its supply of fiduciary media only if it is able to obtain any backing for it. The demand for loans has nothing to do with the willingness of depositors (ANY) to do the business with the bank. Therefore the position of old and modern banking school is mistaken. They just do not provide complete theory.
I agree that there are grave mistakes in Rothbard’s and Mises’ reasoning . However it is not helpful just to criticize, you need to know exactly what their mistakes were. While Rothbard argued on ethical grounds, Mises expected free banking system to arrive at full reserves. The latter did so because he held ANY fiduciary expansion to be harmful and yet he was not prepared to sacrifice free market and embrace fiat full reserves. On the other hand Rothbard saw the mistake of such solution, free banking system does not necessarily mean full reserve ratio. Thus he devised his own (characteristic) solution enabling him to demand full reserves and free market at the same time.
“Such a bank will always be able to redeem its pounds, either for .25 oz of gold, or for other assets with a market value of .25 oz.”
You’re confusing value with price here. You’re also ignoring (as Mises did NOT, in his critique of the Banking School), the ability of the banks to influence the price of their assets through their ability to unilaterally influence demand for their product (loans) by lowering the rate of interest on their loans (the issuing of fiduciary media).
I’m thinking specifically of price, in the sense that a square meter of land sells in the market for a price of 1 oz. of gold. If a bank has issued 400 pounds, while its assets consist of (in addition to paid-in capital) 25 oz of gold, plus 75 square meters of land (equal in price to 75 oz. of gold) then that bank is capable of redeeming 100 of its pounds immediately, and the other 300 pounds can be redeemed at .25 oz. each after the land is sold. As long as both assets and convertibility are maintained, each pound will be worth .25 oz., or .25 square meters.
Suppose the bank did start making loans at a reduced interest rate. Such a bank would fail. It would no longer be able to pay out .25 oz/pound, since its assets would not keep pace with its liabilities.
The Currency Principle suffers flaw.
In 1763, the first great monetary crisis in modern times happened first at Hamburg and Amsterdam where the ” Currency Principle” was in practice and the only Banking Credit that existed corresponded exactly to specie and then spread to England. The ” Currency Principle ” gave no protection whatever against a Monetary Crisis.
Mises and Rothbard did not get banking, unfortunately. A banker is trader who buys money and debt by issuing bank credit (debt owed to customers).
Mises deserves no credit for corrected the Currency School’s errors as others long before Mises already had done so. Also, others rightly explained the business cycle long before Mises.
Mises wrote great works railing against Socialism but attribution of achievements in economic theory to Mises is undeserving.
Likewise, Rothbard was a superb champion of liberty and an incredible historian. Yet his misunderstanding of banking led him to many false beliefs.
The great law of price is at play here, no doubt.
You talk a lot of smack, MacDougal! When attacking these recognized giants of Austrian thought, however, to do so without source attributions or actual arguments doesn’t help your case, and makes you look a bit like a grandstander. Just saying.
It’s Mike Sproul
Actually I think Bill G = Mike Sproul, same crankish arguments, almost to the word.
The name is Bill, not Mike. I’ve decided that life is too short to spend it talking to guys named Beefcake.
Ok…
Using banking as an assumption for the transfer of capital is flawed. It is based on a system that has always been fraudulent.
All regulations and restrictions on the transfer of capital have to be removed other than protection against fraud, deception and theft. Reserve banking in itself isn’t fraud, promising demand deposits [and FDIC insurance] in a reserve bank is. allowing this deception removes the competition reserve banks would face from more secure holding firms or individuals.
When we are all free, not just “bankers”, to transfer or not transfer capital in any way we like and in any way that is valued by others, then we will find out what if any rate, interest will gravitate to and what if any security will accompany an unsecured transfer of capital.
Anything less is just an attempt to impose fraud and theft in a different way, maybe a bit less harmful, maybe even more harmful to the general population. Business cycles are caused by the periodic aggregrate recognition of the fraud that is the basic structure of the financial system.
“Business cycles are caused by the periodic aggregrate recognition of the fraud that is the basic structure of the financial system.”
Awesome.
I agree with the notion that FRB is not necessarily fraudulent. I see no reason why fractional reserve banks should not be permitted in a libertarian society, as long so too are 100% reserve banks.
anything should be permitted [including money creation] as long as whoever holds or transfers the capital does what they say they are going to do with it [or whoever creates the money has whatever they say they have or don't have behind it]. if they don’t, they are being fraudulent and I think that has to be addressed or we end up in the same place, bamboozeled by a bunch of financiers.
Hear, hear.
“Business cycles are caused by the periodic aggregrate recognition of the fraud that is the basic structure of the financial system.”
That’s why we need a permanent quasi-boom.
This is an excellent article on a very complex topic. Well done.
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