I didn’t say a mismatch of assets and liabilities but a duration mismatch.
OK. You must mean an ex post mismatch, as expected assets always equal expected liabilities, Consequently, your statement resolves to, “the greater risk taken the greater the chance for insolvency.” Who could ever disagree?
I’m dubious however about the alleged positive externalities of fractional reserve banking’s capacity to provide liquidity. If anything, I’m inclined to think the opposite is true.
All myths and fallacies aside, whether one accepts fractional reserve banking as an example of spontaneous order, or rather a market/government-supported failure, hinges upon, I think, this question. With a factor being the degree to which one implicit invokes a static equilibrium perfect knowledge framework. One can go as far back to the Spanish Scholastic proto-Austrians and find this same question being debated.
After all, liquidity becomes an increasingly critical issue the greater the degree of systemic leverage.
The critical phrase is “bounded instability.” There are limits to the amount of liquidity a fractional system can provide.
I also find it slightly puzzling that you seem to be suggesting that the demand for money from the public ought to be met by an effectively limitless supply from the fractional reserve system.
Limitless? No just up to the point where marginal cost = marginal revenue, just as in any other free market. Are you suggesting that in a free market the supply of any good should be restricted? And if you do, please elaborate on the specific externalities that would justify this view.
If you now say reserves need never be adjusted, then there seems little point in bringing them up at all.
Didn’t mean to imply that reserves are not important. There are some fine points here that are worth elaborating but I’ve got a plane to catch…
As for your comment about the Scottish “Free Banking” experience, I had another quick look at this and found there are at the very least great differences of opinion on this issue. The following quotes are from Rothbard’s analysis of White’s “Free Banking in Britain.” mises.org/journals/rae/pdf/rae2_1_15.pdf
Take another look. Read Rothbard’s comments on Scottish free banking in “The Mystery of Free Banking.” mises.org
” 2. Free Banking in Scotland
After the founding of the Bank of England, English banking, during the eighteenth and first half of the nineteenth centuries, was riven by inflation, periodic crises and panics, and numerous—and in one case, lengthy—suspensions of specie payment. In contrast, neighboring Scottish banking, not subject to Bank of England control and, indeed, living in a regime of free banking, enjoyed a far more peaceful and crisis-free existence. Yet the Scottish experience has been curiously neglected by economists and historians. As the leading student of the Scottish free banking system concludes: Scotland, an industrialized nation with highly developed monetary, credit, and banking institutions, enjoyed remarkable macroeconomic stability through the eighteenth and early nineteenth centuries. During this time, Scotland had no monetary policy, no central bank, and virtually no political regulation of the banking industry. Entry was completely free and the right of note-issue universal. If the conjunction of these facts seems curious by today’s light, it is because central banking has come to be taken for granted in this century, while the theory of competitive banking and note-issue has been neglected.
Scotland enjoyed a developing, freely competitive banking system from 1727 to 1845. During that period, Scottish bank notes were never legal tender, yet they circulated freely throughout the country. Individual banks were kept from overissue by a flourishing note exchange clearinghouse system. Since each bank was forced to toe the mark by being called upon for redemption, each bank would ordinarily accept each other’s notes. Whereas English country banks were kept weak and unreliable by their limitation to partnerships of six or fewer, free Scottish banks were allowed to be corporate and grew large and nationwide, and therefore enjoyed much more public confidence. An important evidence of the relative soundness of Scottish banks is that Scottish notes circulated widely in the northern counties of England, while English bank notes never traveled northward across the border….
Rothbard was at times very critical of other economists, to the extent of launching into ad hominem attacks.
Enjoyable as it’s been, I get the feeling this exchange may be shaping up as a debate without end. I just wanted to give fair notice that, for the moment at least, my desire to continue is waning. Unless, of course, you hit me with something that really opens up a new perspective!
Yes, enjoyable. I also find myself short on time and long on responsibilities. |
