scholarly journals Unanswered quibbles: George Selgin still gets it wrong with fractional reserve free banking

2021 ◽  
Author(s):  
Philipp Bagus ◽  
David Howden
Keyword(s):  
Banking System ◽  
Real Income ◽  
Jel Classification ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Credit Expansion ◽  
Investment Projects ◽  
Fractional Reserve ◽  
Monetary Equilibrium ◽  
El Sistema

In this article we reply to George Selgin’s counterarguments to our article «Fractional Reserve Free Banking: Some Quibbles». Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations in cash holdings. We show that a coordinated credit expansion in a fractional reserve free banking (FRFB) system is possible and that precautionary reserves consequently do not pose a necessary limit. We discuss various instances in which a FRFB system may expand credit without a prior increase in real savings. These facets all demonstrate why a fractional reserve banking system —even a free banking one— is inherently unstable, and incentivized to impose a stabilizing central bank. We find that at the root of our disagreements with Selgin lies a different approach to monetary theory. Selgin subscribes to the aggregative equation of exchange, which impedes him from seeing the microeconomic problems that the stabilization of «MV» by a FRFB system causes. Key words: Free banking, fractional reserve, monetary equilibrium, credit expansion, economic cycle. JEL Classification: B53, E32, E42, E5, G18, H11, K39, P3, P34. Resumen: En este artículo respondemos a George Selgin, que a su vez respondió a nuestro artículo «Fractional Reserve Free Banking: Some Quibbles». Selgin considera que los saldos de tesorería son ahorros, mientras nosotros nos fijamos en los ahorros reales necesarios para mantener proyectos de inversion. Ahorros reales son ingresos reales no consumidos. Variaciones en los ahorros reales no necesariamente coinciden con las variaciones en los saldos de tesoreria. Mostramos que una expansión crediticia coordinada es posible en un sistema bancario de reserva fraccionaria (FRFB) y que las reservas prudenciales no constituyen necesariamente un limite a la expansión co - ordinada. Discutimos varios escenarios en los que el sistema FRFB puede expandir los créditos sin un aumento previo en los ahorros reales. Todas estas facetas muestran que un sistema bancario de reservas fraccionarias —incluso uno de banca libre— es inherentemente inestable y produce incentivos para imponer un banco central estabilizador. Mostramos que el origen de nuestras diferencias con Selgin está en un enfoque diferente a la teoría monetaria. Selgin es partidario de la ecuación de intercambio que es muy agregada y que le impide ver los problemas microeconomicas que la estabilización de «MV» por parte del sistema FRFB produce. Palabras clave: Banca libre, reserva fraccionaria, equilibrio monetario, expansión crediticia, ciclo económico. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34.

scholarly journals Free banking, the real-balance effect, and Walras’ Law

2021 ◽  
pp. 241-258
Author(s):  
Ludwig van den Hauwe
Keyword(s):  
Key Words ◽  
Banking System ◽  
Jel Classification ◽  
Free Banking ◽  
Real Balance ◽  
The Real ◽  
Fractional Reserve ◽  
Monetary Systems ◽  
Palabras Clave ◽  
Erroneous Interpretation

The author of this article draws special attention to two particular claims of the free bankers concerning the supposed working characteristics of a fractional-reserve free banking system which may strike the reader as questionable. The first of these relates to the alleged absence of a real-balance effect under free banking. The second relates to the free bankers’ reference to Walras’ Law as providing a rationale for the free banking system’s «offsetting» actions when confronted with changes in the public’s demand to hold bank liabilities. This rationale is defective since it is based on an erroneous interpretation of Walras’ Law. The author’s conclusion does not imply that it is not at all possible, from a rational viewpoint, to make a plausible case for this variant of free banking, only that the argument should be freed from certain questionable tenets. Key words: Free banking, monetary systems, real-balance effects, Walras’ Law. JEL Classification: E0; E32; E42; E5; E51; E52. Resumen: El autor de esta nota llama la atención sobre dos alegaciones particulares relativas a las supuestas características operativas de una banca libre con reserva fraccionaria que podrían resultar cuestionables al lector. La primera se refiere a la supuesta ausencia de efectos de saldo real en la banca libre. El segundo guarda relación con la referencia de los teóricos de la banca libre con reserva fraccionaria a la Ley de Walras que constituiría la base lógica de las acciones «de compensación» de la banca libre al enfrentarse a cambios en la demanda de medios fiduciarios por parte del público. Esta base lógica es defectuosa puesto que parte de una interpretación errónea de la Ley de Walras. La conclusión del autor no implica que no sea posible en absoluto, desde un punto de vista racional, elaborar una argumentación plausible para esta variante de la banca libre, sino que la argumentación debe estar libre de determinados argumentos cuestionables. Palabras clave: Banca libre, sistemas monetarios, efectos de saldo real, Ley de Walras. Clasificación JEL: E0; E32; E42; E5; E51; E52.

The fractional reserve Banking diagram

2021 ◽  
pp. 81-104
Author(s):  
Edward W. Fuller
Keyword(s):  
Default Risk ◽  
Liquidity Risk ◽  
Central Banking ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Banking Systems ◽  
Fractional Reserve ◽  
Rate Risk ◽  
El Sistema ◽  
Reserve Banking

Fractional reserve banking systems are inherently unstable. Fractional reserve banks create three types of risks when they make loans: liquidity risk, interest rate risk, and default risk. These risks interact to make fractional reserve banking systems unstable and prone to failure. This paper derives the Fraction­ al Reserve Banking Diagram. The diagram is used to illustrate liquidity risk, in­ terest rate risk, and default risk. Finally, the diagram is used to compare central banking, free banking, and 100 percent reserve banking. Keywords: Fractional Reserve Banking, Central Banking, Free Banking, 100% Reserve Banking, Banking Panics JEL Codes: E32, E43, E50, E52, E58, G21 Resumen: El sistema bancario de reserva fraccionaria es inherentemente ines­ table. Los bancos de reserva fraccionaria crean tres tipos de riesgos cuando conceden préstamos: riesgo de liquidez, riesgo de tipo de interés y riesgo de impago. Estos riesgos interactúan para hacer de la banca de reserva fraccio­ naria inestable y propensa a la quiebra. Este trabajo deriva el Diagrama de Banca de Reserva Fracciona. Este diagrama se utiliza para ilustrar el riesgo de liquidez, el riesgo de tipo de interés y riesgo de impago. Finalmente, se utiliza para comparar la banca central, el sistema de banca libre y la banca con co­ eficiente de reserva del 100%. Palabras clave: Banca de reserva fraccionaria, Banca Central, banca libre, banca con coeficiente de reserva del 100%, pánicos bancarios. Clasificación JEL: E32, E43, E50, E52, E58, G21

scholarly journals A Digital Currency Architecture for Privacy and Owner-Custodianship

2021 ◽  
Vol 13 (5) ◽  
pp. 130
Author(s):  
Geoffrey Goodell ◽  
Hazem Danny Al-Nakib ◽  
Paolo Tasca
Keyword(s):  
Systemic Risk ◽  
Banking System ◽  
Developed Countries ◽  
Fractional Reserve Banking ◽  
Point Of Sale ◽  
Digital Currency ◽  
Fractional Reserve ◽  
Banking Relationships ◽  
Reserve Banking ◽  
Payment Mechanisms

In recent years, electronic retail payment mechanisms, especially e-commerce and card payments at the point of sale, have increasingly replaced cash in many developed countries. As a result, societies are losing a critical public retail payment option, and retail consumers are losing important rights associated with using cash. To address this concern, we propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both e-commerce purchases and point-of-sale purchases that are required to be cashless. Our proposal introduces a government-backed, privately-operated digital currency infrastructure to ensure that every transaction is registered by a bank or money services business, and it relies upon non-custodial wallets backed by privacy-enhancing technology, such as blind signatures or zero-knowledge proofs, to ensure that transaction counterparties are not revealed. Our approach to digital currency can also facilitate more efficient and transparent clearing, settlement, and management of systemic risk. We argue that our system can restore and preserve the salient features of cash, including privacy, owner-custodianship, fungibility, and accessibility, while also preserving fractional reserve banking and the existing two-tiered banking system. We also show that it is possible to introduce regulation of digital currency transactions involving non-custodial wallets that unconditionally protect the privacy of end-users.

Rozeff on free banking: a critique

2018 ◽  
Vol 34 (2) ◽  
pp. 123-136
Author(s):  
Laura Davidson ◽  
Walter E. Block
Keyword(s):  
Design Methodology ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Monetary System ◽  
Fractional Reserve ◽  
Reserve Banking

Purpose The purpose of this paper is to correct Rozeff (2010). He contends that fractional-reserve banking is legitimate and efficacious. The authors demonstrate that it is not. Design/methodology/approach The design of this paper is to quote widely from Rozeff (2010) and then to expose his errors of analysis. Findings The authors demonstrate that fractional-reserve banking is neither legitimate nor efficacious. Originality/value Money is the lifeblood of the economy. If so, then banking is the marrow of the economy, since it is from that sector that money arises in the first place. It is crucially important, then, that the monetary system be based on sound principles. Fractional-reserve banking is a violation of these sound principles. Therefore, it is valuable to demonstrate that this is indeed the case.

scholarly journals Money, Banking, and Financial Markets

2019 ◽  
Vol 87 (5) ◽  
pp. 2049-2086 ◽  
Author(s):  
David Andolfatto ◽  
Aleksander Berentsen ◽  
Fernando M Martin
Keyword(s):  
Central Bank ◽  
Financial Markets ◽  
Dynamic Model ◽  
Banking System ◽  
Free Banking ◽  
Lender Of Last Resort ◽  
Fractional Reserve ◽  
Deposit Contracts ◽  
Liquidity Insurance ◽  
Meaningful Role

Abstract The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997, Journal of Political Economy105, 928–956) model of banking and financial markets with the Lagos and Wright (2005, Journal of Political Economy113, 463–484) dynamic model of monetary exchange—a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable in government money, where the terms of bank deposit contracts are affected by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. Among other things, the model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.

Fiat money: from the current Islamic finance scholars’ perspective

Humanomics ◽  
2017 ◽  
Vol 33 (3) ◽  
pp. 274-299 ◽  
Author(s):  
Syammon Jaffar ◽  
Adam Abdullah ◽  
Ahamed Kameel Mydin Meera
Keyword(s):  
Design Methodology ◽  
Banking System ◽  
Commercial Banking ◽  
Quantitative Investigation ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Fiat Money ◽  
Fractional Reserve ◽  
Level Of Knowledge ◽  
Reserve Banking

Purpose This paper aims to discuss the opinions of current Shariah scholars on the concept of debt money in the present-day fiat money system. Design/methodology/approach Research design of this paper is a quantitative investigation of Shariah experts by distributing a questionnaire to them. As majority of Shariah scholars are also Shariah advisory of the current banking system, it is important to find out their level of knowledge on the issue of debt money created by the commercial banking system through the fractional-reserve banking (FRB) system. Findings Based on this investigation, most Shariah scholars are unaware of and confused about the mechanics underpinning the creation of money, especially with respect to FRB as it is practiced by the conventional and Islamic banking systems. Originality/value Based on this research, it is recommended that these scholars should improve their understanding of the operation of the fiat money system and its consequences. It is recommended that, in future, Shariah scholars should think “outside of the box” by creating Islamic financial instruments that do not resemble those of the conventional system.

scholarly journals Stability of Gold Standard and Its Selected Consequences

2021 ◽  
pp. 33-56
Author(s):  
Michal Kvasnicˇka
Keyword(s):  
Gold Standard ◽  
Relative Size ◽  
Banking System ◽  
Jel Classification ◽  
Fractional Reserve ◽  
Gold Market ◽  
The World ◽  
Market Shocks ◽  
The Stability ◽  
Near Future

The gold standard was quite stable in the past: the price level changes were relatively small, and trade cycles mild. However, its past stability does not guarantee stability nowadays. We show that the stability of the gold standard to shocks stemming from the world gold market depends critically on the size of the monetary stock of gold relative to the extent of these shocks. Every change decreasing the relative size of the monetary stock of gold lowers its stability. We discuss some consequences of the thesis too: first, any system economizing on its gold reserves (e.g. the mature fractional reserve free banking system of the Scottish type) may undermine the stability of the gold standard. Second, an attempt to reestablish the gold standard may have to include a collective action of many countries of a great economic power. If a single small country tried to resume to the gold, its monetary stock of gold would probably be tiny relative to the world gold market shocks, and the economy could be destabilized by these shocks. It makes the return of the gold standard rather improbable in the near future. Key words: Gold Standard, Stability, Inflation, Trade Cycle. JEL Classification: E31, E39, E42, N10.

The Chicago Plan Revisited: An Austrian critique

2021 ◽  
pp. 253-271
Author(s):  
Marius Kleinheyer
Keyword(s):  
Banking System ◽  
Central Banking ◽  
Fractional Reserve Banking ◽  
Complete Control ◽  
Economic Discourse ◽  
Working Paper ◽  
Fractional Reserve ◽  
Original Plan ◽  
Fundamental Reflection ◽  
Reserve Banking

Within the context of the economic crisis since 2007 a space for fundamental reflection on the institutional structure of the finan-cial system has been opened, allowing for the introduction of sig-nificant reform proposals in the economic discourse. The IMF economists Jaromir Benes and Michael Kumhof published a work-ing paper in August 2012, reintroducing the Chicago Plan as such a proposal.2 Following up the work of Irving Fisher (1935)3 the au-thors propose the separation of the monetary and the credit func-tions of the banking system, by requiring 100% reserve backing for deposits. This plan is designed to eliminate the possibilities for private banks to create money through fractional reserve banking and is supposed to give governments the complete control over money issuance. The central bank, upgraded as a powerful mone-tary commission, is seen as the best candidate to serve as a state’s monetary authority in the exercise of its monetary prerogative (monopoly of currency, money issuance, and seigniorage). The purpose of this paper is to provide an overview of the ele-ments of this reform proposal, contrast it with a recapitulatory display of the Austrian analysis and evaluate the plan based on its political desirability. In the first step, the original plan from 1935 by Irving Fisher is presented. Second, the newest version and the key findings of Ben-es and Kumhof are summarized. Third the Austrian critique of fractional reserve banking and central banking is laid out. In the fourth step, a response to a peculiarity of the working paper about the origin of money is offered. In conclusion a brief discussion on the likelihood of political implementation and the evaluation from the Austrian perspective close the argumentation.

scholarly journals The Uneasy Case for Fractional- Reserve Free Banking

2021 ◽  
pp. 143-196
Author(s):  
Ludwig van den Hauwe
Keyword(s):  
Business Cycle ◽  
Institutional Analysis ◽  
Banking System ◽  
Invisible Hand ◽  
Free Banking ◽  
Monetary Reform ◽  
Fractional Reserve ◽  
Palabras Clave ◽  
Banking Business ◽  
The Business Cycle

Since a few decades several sub-disciplines within economics have witnessed a reorientation towards institutional analysis. This development has in particular also affected the fields of macroeconomics and monetary theory where it has led to several proposals for far-reaching financial and monetary reform. One of the more successful of these proposals advocates a fractional-reserve free banking system, that is, a system with no central bank, but with permission for the banks to operate with a fractional reserve. This article exposes several conceptual flaws in this proposal. In particular several claims of the fractional-reserve free bankers with respect to the purported working characteristics of this system are criticized from the perspective of economic theory. In particular, the claim that a fractional-reserve free banking system would lead to the disappearance of the business cycle is recognized as false. Furthermore an invisible-hand analysis is performed, reinforcing the conclusion that fractional-reserve free banking is incompatible with the ethical and juridical principles underlying a free society. Key words: monetary and banking regimes, comparative institutional analysis, fractional-reserve free banking, business cycle, invisible hand. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34 Resumen: Desde hace algunas décadas varias subdisciplinas de la economía se ven reorientadas hacia el análisis institucional. Este desarrollo ha afectado más específicamente también a los campos de la macroeconomía y la teoría monetaria donde ha llevado a varias propuestas de reformas financieras y monetarias de gran alcance. Una de las propuestas más exitosas aboga por una banca libre con reserva fraccionaria, o sea un sistema sin banco central en el cual, sin embargo, los bancos puedan operar con una reserva fraccionaria. Este artículo comenta varios defectos conceptuales de dicha propuesta. Más específicamente, varias alegaciones de los banqueros de la banca libre con reserva fraccionaria relativas a las supuestas características operativas de este sistema se critican partiendo de la teoría económica. Más en particular, se denuncia como errónea la alegación de que una banca libre con reserva fraccionaria llevaría a la desaparición del ciclo económico. Además, se realiza un análisis de mano invisible lo cual refuerza la conclusión que la banca libre con reserva fraccionaria es incompatible con los principios éticos y jurídicos propios de una sociedad libre. Palabras clave: banca libre con reserva fraccionaria, ciclo económico, mano invisible.

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