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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (54184)	2/19/2006 2:32:49 AM
From: basho	Read Replies (1) \| Respond to of 110194

I simply meant that the greater the degree to which banks borrow short and lend long, the greater the potential for destabilising liquidity crises. For me, the whole issue of the validity and effectiveness of a fractional reserve banking system comes down to whether it is based on specie or fiat money. We agreed, I thought, that left to its own devices the market would choose the former. As previously noted, I also think that demand deposits ought legally to be treated as claim transactions, not credit transactions, but accept this is a very hotly contested point. Anyway, even without that contentious provision, and in the absence of various state sponsored guarantees or privileges, a number of consequences follow: 1) Yes, it is then to my mind an example of spontaneous order. 2) Yes, there are then very definite limits to liquidity expansion. 3) The supply of money (ie specie) to the public would be constrained by what was actually available, not the potentially unlimited supply of fiat money. Finally, a further brief comment on Scottish free banking. My principal reason for responding to your Scottish free banking comment was to do with the question of reserves. Here, the evidence is apparently sparse and mixed but from what I can see, in the mid 1700s at least, specie reserves tended to be 2-4% with holdings of notes from other banks adding another 15-20%. More generally, while I don’t pretend to expertise in this area, even a brief review of the literature does indicate there are quite strongly differing views, including it seems by Rothbard with himself! Not on free banking’s existence, nor on the fact that on balance it provides strong support for free market banking, but rather on the degree to which it was “pure”and also the details of its performance. Sechrest has written a piece (Free Banking: A Dissenting View) that goes into some detail on various aspects including failure rates, note inconvertability, the privileges of chartered banks etc. If you haven’t seen it, worth a look anyway. All the best with your trip.