Monday, April 28, 2014

The Financial Times Turns Rothbardian on 100% Reserve Banking Question

The advance of the ideas of the great economist Murray Rothbard continues, in some very unexpected places.

First, there is news that the Bureau of Economic Analysis is going to start releasing new data about gross output that will not include any measure of government operations (SEE:  WOW The Bureau of Economic Statistics Is About to Start Tracking the Economy in Austrian School and Rothbardian Fashion), a decidedly Rothbardian idea.

Now, Martin Wolf,chief economics commentator at the Financial Times, London, is prompting a very Rothbardian idea: One hundred percent reserve banking. In a column titled, Strip private banks of their power to create money, Wolf writes:
Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated....

One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well....

Banks could offer investment accounts, which would provide loans. But they could only loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are. Holdings in such accounts could not be reassigned as a means of payment. Holders of investment accounts would be vulnerable to losses. Regulators might impose equity requirements and other prudential rules against such accounts.

To be sure, Wolf still sees a role for a central bank, while Rothbard did not, but  the idea of 100% reserve banking is pure Rothbard.

Rothbard put it succinctly in a 1990 interview:
AEN: What about the argument that 100% reserves requires government intervention?
MNR: I regard fractional-reserve banking as an intervention in the free market, just as any crime against person and property is intervention. In the case of banking, the government is allowing the crime to be committed.
It is not clear if the thinking of Rothbard had a direct influence with the BEA or with Wolf, but clearly Albert Jay Nock's notion of a "remnant" keeping the embers burning until an idea has enough traction to spread more generally, applies here. This should encourage all writers and thinkers within the sphere of Austrian school economics and libertarianism.


  1. I suspect this is MMT influence. Take the money creation power away from "private" banks and give it all to the government. Such a program will eliminate the problem of scarcity [right?] because the government need not first collect taxes to "spend" and can never run out of "dollars".

    Now that's an economic theory!

    1. Good point, that may be the influence.

    2. The citation of Irving Fisher, not Rothbard, should have been the clue. People don't want reality, as long as it is in any way possible to evade it and foist the payment for the consequences off onto someone else. They will happily embrace a nut-ball like Ellen Brown before getting sober and considering Rothbard's idea that wealth cannot be faked into existence. I think it's a modern-day superstition. Deep-down, even to the subconscious, people want to believe that "the right people" can control the economy for the benefit of "the deserving," whomever they consider that to be. The idea that people cannot control the economy and that the attempt creates perverse, unintended consequences frightens them, way down in the lizard brain. Rothbard's universe is far too terrifying for them to live in it. They need someone to reassure them that, even if not real, Santa Claus is possible.

    3. Based on Wolf's recent writings, I suspect this is the case. Detlev Schlicter has a good writeup of some of his recent work:

      "...what does Martin Wolf take away from this? – That the state needs more control so that it can create more money. Here, Wolf parades his own ignorance of monetary history and theory. “…subcontracting the job of creating money to private profit-seeking businesses is not the only possible monetary system. It may not be even the best one. Indeed, there is a case for letting the state create money directly.”

      Mr. Wolf must believe that creating money is a natural prerogative of the state, some kind of natural monopoly whose exercise the state foolishly “subcontracted” to private bankers, who have sadly revealed themselves unfit for the task. This is not only false; it is the wrong way round.

      As Wolf stated correctly earlier, “What makes banks special is that their liabilities are money – a universally acceptable IOU.” Banks have always issued forms of money; it is a business they created as free capitalist enterprises before state fiat money and central banks even showed up on stage and began to socialize the consequences of banking and politicize the sphere of money. In an entirely free market with hard, apolitical money at its core and no state central bank, the ability of banks to issue money is severely restricted and ultimately checked by its own customers, in particular depositors. (This does not mean that fractional-reserve banking is without inherent problems, even in a free market; only that free banking is limited banking and thus safer banking.)"

  2. This will be interesting….

    AEN: What about the argument that 100% reserves requires government intervention?

    MNR: I regard fractional-reserve banking as an intervention in the free market…

    Rothbard does not answer the question, at least not in this quote.

    The reality is that two individuals cannot hold equal claim to the same asset at the same time; therefore fractional reserve banking as defined in this manner is not merely fraud – it is impossible. There can, of course, be no enforceable contract for an impossibility (e.g. a squared circle).

    As for today’s deposit contract (for which many apply the label fractional reserve), the above impossibility is not present. Two individuals do not have equal and simultaneous claim. There is no impossible contract and there is no fraud. It would require government intervention to disallow today’s deposit contract.

    The problem is the monopoly, nothing more. The monopoly (and the government backing necessary to enable it) disallows the market from properly regulating currency expansion.

    Don’t believe me? Ask Mises and Rothbard; they will tell you.

    1. In fractional reserve banking, two individuals do not hold equal claim to the same asset at the same time. You deposit $100 in a bank,the bank holds onto 10% and lends out the rest. You can get your $100 out any time you want. The bank will use money borrowed from someone else to pay you. If the bank can't make the payment, then the bank fails and the FDIC makes the payment.

    2. Wolfie's narrative is surprisingly held by many of my fellow Austrians who are stuck in this perverted gold standard monetary regime that existed (until Nixon closed the gold window).

      Loans can be created by banks at will which is what creates deposits in a fiat money system. The only time way they are constrained is by Federal Reserve's interest rate policy and Basel's Capital Requirements absent free and quas-free market forces like the ones that exist for Swiss banks and Kiwi banks to a slight extent where the "give a sh*t" factor is higher compared to EUCCP and North America.

      Robert, please look into the Post Keynesian Economist Steve Keen's research about how fiat money system is different compared to the gold standard. That guy may be a political hack but he brings out fabulous points that have helped me with my investing (although I would not take his market calls seriously just like his prescription of debt-jubilees is batsh*t insane.

      One thing Post-Keynesians ignore is moral hazard, competitive currencies and principal agent problems when the govt. interferes (they blindly blame the pvt. sector instead of the nexus that exists given the State has granted the Fed monopoly currency issuing power).

      I look forward to your writeup (perhaps Bob English or Chris Rossini could do a detailed analysis from an Austrian perspective. The only other decent analysis I have seen is with Mish who still leaves a lot to be desired!).

      TLDR: Austrians are right about the causes and wrong (or only half-right) about the mechanics (logistics) of fiat money created bubbles. Whereas, post Keynesians are the other way round!

  3. While the Financial Times credits Fisher's plan from the 1930's, it should be remembered that Mises reported on this problem in 1912.