One interesting position taken by many of the Austrian economists is that either a 100% reserve requirement ought to be held by banks, or banks ought to be considered insolvent by definition.
Now, I thought about the former idea, and certainly it would tend to prevent monetary inflation--meaning both increase of the money supply and also increasing prices. This would be a good thing.
On the other hand, I appreciate the convenience of putting my money in a bank, as well as the interest I get on my accounts. If the bank required 100% reserves, could it loan out any money?
Think about it; if it hands out gold, it no longer has 100% reserves. If it hands out notes--my passbook and the debtor's bank notes--it also no longer has 100% reserves. I fail to see how loans would be possible in such a scenario, unless banks were eliminated. Am I missing something here?
If I understand this properly, I think the Founding Fathers got it right when they allowed fractional reserve banking. Yes, let's have a reserve requirement (and make it known) to avoid devastating losses with runs on a bank, but let's not throw the baby out with the bathwater, either.
Also, a thought on what commodity/real money does; since gold has other uses besides money, holders of gold can take it elsewhere if its value as money isn't high enough. However, with fiat money, we have a more or less fixed supply at any given time, no matter what it buys.
This will tend to exacerbate volatility in prices, as the supply cannot adjust to a shifting demand curve to provide more or less.
Podcast #1047: The Roman Caesars’ Guide to Ruling
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The Roman caesars were the rulers of the Roman Empire, beginning in 27 BC
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11 hours ago
8 comments:
...i'm still baffled as to this gold standard thing. I don't understand monetary policy nearly enough to fit my head around it, so I'll hold off until a later date.
ah! I'll employ my most limited resource, time, toward learning more foundational tenets of economics.
...and, besides, Milton Friedman didn't seem to care about it all that much. Heard him say that having a fixed inflation of 3%/year and getting rid of the Fed would work just fine. :)
Take a good look at Mises.org for details. More or less, having a federal bank that can "make" (counterfeit, really) money produces more or less a supply of money that is completely insensitive to demand.
Now that is more or less remedied by Federal Reserve rate changes, but reality is that this fools people into accepting loans on bad pretenses. The "Austrians" call it "malinvestment."
I'm not quite sure, BTW, how you would have fiat money without a central bank to print it. As much as I respect Friedman, I disagree with him on this aspect of money.
Perhaps Milt was suggesting the Gummint could take over the issuing services of the "Federal" (it isn't) "Reserve" (it has none) "System" ("whims" of one man?)
no, he was suggesting that a computer could do it.
Having done some programming, that idea scars the tar out of me, Shawn--remember the Navy ship running Windows NT that had to be towed back into port because of a data entry error? Imagine that happening with the economy.
The banks would be free to lend Time Deposits for their term. Also, see Dr. Antal E. Fekete on the topic of "Real Bills" as a means of introducing self-expiring, non-inflationary credit.
-dph
There will most likely always be fractional reserve lending as long as there are banks. The temptation is simply too great. This, in itself, is not the problem. We have, with the Federal Reserve, created a banking system with Riley-Day syndrome. That is, the Fed, as lender of last resort, has removed the pain. The risk of over-extended banks being discovered and bankrupted by a run has been removed. Of course they are going to lend (inflate) with abandon.
-dph
Anatomy of the Bank Run
by Murray N. Rothbard
http://www.lewrockwell.com/rothbard/rothbard163.html
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