[0:00]
okay why don't we go ahead and get started here so what we're talking about now is rothbard Ian's versus free bankers on fractional reserve banking so let me just define the term at the outset to make sure I assume most of you here know what these terms mean but just in case you don't so there was this guy Murray Rothbard perhaps you've heard of them and so a rothbard en means up to now the term fractional reserve banking so here the idea is you go into a bank you I will just use modern context with 
[0:30]
with modern types of money just to make it simple for those who have never heard this spelled out before for a lot of you this is gonna be real simple stuff so you go into a bank and you give them a thousand dollars and then your checking account balance goes up by one thousand dollars and so you are walking around town thinking you have in the bank a thousand dollars but of course they can lend some of that out alright and so if instead if they were to keep full reserves you know in the vault or you know another some secure place in a 
[1:01]
sense backing up all of those checking account deposits we would say they have a hundred percent reserves if instead though they only had half of the actual money that people think they could show up at any time and say give me my money please cuz you know I was storing it here give me my money it's an attacking account I go to the ATM it says I have it available so I'd like it if they actually could only satisfy half of all the total outstanding checking account deposits that way they would have 50 percent reserves okay so fractional reserve banking means when bangs conduct 
[1:33]
their operations such that they only keep on reserve a fraction of what they would need if everybody who thinks in practice they can just show up and get their money out to keep that much in reserve to in a sense back that up okay so that's what that this debate is about okay also a note you saw in the title that it had free bankers in quotation marks okay and so this is each year fewer and fewer people get this this is dr. evil because he would talk about 
[2:03]
laser-beam okay and so the reason in my talk you know in the title and so forth that we have free bankers and free banking in quotation marks is because in a sense that's a misnomer alright if what you mean by free banking is you don't want there to be a coercive political state apparatus that imposes regulations and penalties and other things to influence the development of the banking sector in the market economy well in that sense any standard Roth 
[2:34]
barding is a free banker - right because they're an anarcho-capitalist and so there's not going to be a state to lay down regulations insisting on a certain reserve requirement okay so it's just for convenience because the way this debate has played out in the journals the the group of people and I'll in a minute show you who the participants have been or some of the major participants the ones that are arguing in favor of saying hey in a even in a free society total libertarian world we think that banks would should be allowed 
[3:05]
to set whatever reserve requirement they want right just like what what the fees would be on a checking account or how many armed guards a bank has that's not a matter of government regulation and certainly that's not something intrinsic to the legal code and even in a libertarian world that that's just you know Bank policy and you know how many or how many tellers they'll have or how long it will be open for on Friday afternoons these are all things that bank should decide based on profit and loss considerations likewise the so-called free bankers in the context of 
[3:37]
this debate they argue that banks should set whatever reserve requirements is profit maximizing and they think in practice it would be well below a hundred percent okay whereas the hundred percent reservists of course are gonna say no we think in a in a free society the banks would tend to have towards 100 percent reserves or outright hundred percent reserves and also there's some economic dispute in this debate that I'm gonna focus on as we go through this but 
[4:07]
again so that my point being in a sense I'm a free banker and Joe Salerno is a free banker and Walter blocks a free banker in a certain sense but in the context of this debate we wouldn't be and it's just for matters of convenience it's not because actually were for necessarily government regulation since they wouldn't exist okay let me also just mention and I'm partly stressing this because when I was younger I didn't realize this if you join these debates on the internet number one you should reconsider your 
[4:38]
life choices but number two you'll often see it just bandied about that oh yeah only those wacky Rothbard Ian's and I know I contributed perhaps to that belief with the title of my talk being Rothbard Ian's versus but don't walk away thinking oh yeah it's only this crank --is-- group of economists in the following in the wake of Murray Rathbun and his weird views about banking policy who could endorse 100% reserve banking that that's not true at all so there's a rich history in this so for example 
[5:08]
perving Fisher was he had a quite famous proposal and if you know you go Google Irving Fisher 100% reserves you'll see it that in the 1930s they came out the chicago school of that time was in favor of 100% reserve banking because they thought that would have helped prevent some of the problems with a Great Depression Friedrich Hayek also at times in his career came out in favor of it such that Larry white actually has written an article I'm not gonna get the title perfect but along the lines of how 
[5:40]
come hi didn't agree with the free bankers you know something like that so this isn't controversial my claim here that people in the free banker camp acknowledged that Hayek at least at points in his career said things that were favorable to the hundred percent Reserve people Milton Friedman also at some points in his career wrote in favor of a hundred percent reserve banking for various technical reasons and then more recently so this was just a few years ago and one of those I think it was it like the Jackson Hole conference you know where monetary economist gonna 
[6:10]
present papers Nobel laureate ed Prescott okay so not some crank at some obscure University but a Nobel laureate presented a proposal with a co-author for a hundred percent reserve banking because they thought studying what happened during the financial crisis of default you know that it's struck in fall of 2008 Prescott and his co-author thought oh you know what if we actually if there were an option of a hundred percent reserve checking account balances a lot of the stuff that you know the the imbalances that develop that reared 
[6:41]
their ugly head in the fall of 2008 maybe that could have been mitigated okay so there these people aren't all you know coming at it from the perspective that I'm gonna outlay and/or outline in a little bit here from the Austrian you know meet Mises rothbard line in terms of why they would be in favor of a hard percent reserve banking so don't misunderstand I'm not saying these people are all crypto Austrians but the point is this idea that the only people who could possibly be in favor of 100% reserve banking are weirdo rothbard 
[7:12]
Ian's that's that's not true okay there's other things we're off by Erdogan's are unique for but not this one later in the week I'll do all on those other ones okay so just to give you an idea some of the names of the people involved here so in the so called free banker camp and also by the way the reason I put Austria in quotation marks here it's not that I'm throwing elbows at somebody it's because Celgene himself doesn't like labels so he doesn't want to be called an Austrian economist not because he has a problem with Austrian economics but because you know that 
[7:42]
constrains him and he's his own man that sort of thing right so that's why I'm putting the label here I'm not taking digs at people so Celgene and white are the two most famous and prolific in the free banker camp who come at this stuff either explicitly as Austrians or from a very Austrian friendly point of view and so they understand the points that Roth bardeen's bring up in this debate Steve Horowitz is another one who's written a lot on this on the other side again not that I'm enumerate every buddy but just some of the big names you'll see if you read some of the classic exchanges in this on this topic 
[8:14]
you got Guiteau Hulse min walter block Joe Salerno oh wait that's Eric Clapton sorry my oh wait that's Eric Clapton sorry my mistake you've got the present Murphy and then also when I was younger I was on the other side okay and I wasn't thinking clearly back then okay but that this wasn't merely a vehicle for me to use a cheap joke here this is true that when I was younger I actually agreed more with the people who you know call themselves free bankers and so that's partly why I'm stressing 
[8:44]
things that you know to get rid of misconceptions because some of that stuff that I I used to think to and then as I read more and realize what the claims actually were okay so again these these are some of the people who if you read the exchanges have been weighing in on both sides of the issue okay another thing that it's necessary to clear up you'll see this right at the outset in some of these debates is that some people will say and even trained economists like I I've seen this happen where they'll learn that are you kidding 
[9:14]
me there's some economists out there who are in favor 100% reserve banking not realizing that there's this whole tradition of you know top-flight Nobel prize-winning economists who fall into that camp for various reasons and they'll say don't they honor that's how banking works like you couldn't have banking how could it how could you have somebody you know savers go they give funds to the intermediary institution and then it lends it out to other people and and how how would that even work without having fractional reserve banking alright and so this and this is how many people think about it not just 
[9:47]
economists because the idea is being well yeah if I'm going to give my money to the bank and then they're you know they have to be able to lend it out to earn interest otherwise how you know how are they gonna pay me interest so that's the the dilemma that people have they think that this has to be something intrinsic to banking itself that fractional reserve banking necessarily goes hand in hand with just banking because otherwise how would it even be profitable so that's not correct alright so and and what's what's happening here is your blend if that's where you're coming from you're blending together two different distinct functions that banks 
[10:18]
serve in the modern world okay so one thing is they can maintain what's called demand deposits meaning you can get that money upon demand that's where the title comes from and so just think of like a checking account like that that's what a demand deposit would be and so why would you use a demand deposit that's 100 percent reserves because it's for safety and convenience right all the reasons that years why would you keep your money in a bank well because it's somebody mugs you you know they're not gonna get access to all 
[10:48]
of your you'll find your monetary wealth if you've got a bunch of it in the secure institution just the convenience you're writing big checks to people you're sliding your debit card all that stuff is possible because of this number one this point number one here where you it's your money and you're just storing it somewhere safely and then they come up with convenient ways that you can transfer it to others that don't involve you physically being in possession of it and handing it over to somebody because then that's inconvenient and also it's risky because you could be liable to you know getting mugged alright so that is 
[11:20]
what a demand deposit or checking account balance would be and then a whole separate function of what modern banks do in practice is to act as credit intermediaries and so this you can call these things time deposits meaning the person deposits the money for a given amount of time right it's not a demand deposit they can't request that upon demand their money's tied up for a contractually specified length of time and so think of that like is a genuine savings account okay so again even here it gets tricky 
[11:50]
because for a lot of you probably the distinction between a checking and a savings account at your local bank that you use in practice you don't really see what the differences but theoretically speaking these are distinct functions that banks serve okay and so here the easiest way to think about is a certificate of deposit or a CD if you know what that is right so you might be driving you see the bank sing uh you know CDs at one point two percent or whatever it is and so there the idea is let's say you give the bank a thousand dollars and then they give you a piece of paper that's legally binding saying 
[12:22]
the the bearer of this certificate twelve months in the future is entitled to one thousand fifty dollars let's say okay so that would be a five percent implicit rate of return or yield on that thing and so what you're doing is you're lending your money to the bank for a year okay it's and if you lend you give them a thousand dollars they're giving you a claim on the money that's not money that you hold right the CD is not money it's not part of the money supply and if you oh shoot I need money you know two weeks from now the 
[12:53]
bank doesn't owe it to you you can't just show up and say hey you know what that thousand dollars has been rollover for two weeks can you give me that plus a little bit of the interest that's not what you're entitled to it says no on this date you know that's 12 months in the future you get a thousand 50 so what you can do is sell that thing in the secondary market if you want and somebody else might give you a little bit more than $1,000 for it because they know if they hold on to that thing they're 8050 you know in 11 months and change so but you're not it's not contractually guaranteed to you and if 
[13:24]
interest rates shift in the meantime from when you gave that thousand dollars the amount you get for that then like if interest rates go way up in the meantime then maybe you can sell it and only get $700 back okay so that's that's the way these things work all right so that's but either way notice that's a totally distinct function and so the last little clue here just in case you're confused under 100% reserves there would have to be some way that banks would be paid for providing the services of offering 
[13:56]
demand deposits okay so so yes they have to make that money somehow and in practice if they're allowed to engage in fractional reserve banking then yeah they they just they eat those costs because they're lending the money out into earning interest from other borrowers and so they're implicitly paying for it that way and then they're giving you less you know that they have a spread so that's the way a fractional reserve bank does it but if a bank were being run according to a hundred percent reserves they would have those two distinct functions so there would still be savers using banks 
[14:28]
and banks would still you know perform their role as credit intermediaries just think through for a second why that's important just make sure I'm not losing anybody so something like buying a house if you wanted to you know there's a young couple they both have jobs and so it maybe makes sense for them to go ahead and get into a house before they can pay for it themselves and so what happens they go to a bank they get a 30-year mortgage or whatever or maybe you know in a free society without government intervention maybe ten-year mortgages would be the norm I think it 
[14:59]
would be lower than 30 but let's say that's the case so the way that works in practice is lots of people around the community save little a little bit and give it to the bank and then the bank has lots and lots people doing that and gives interest to those savers and then the banks staff identify the creditworthiness of the various loan applicants and so if you didn't have the bank doing that it would be really difficult for a young couple to take out a mortgage right you wouldn't be able to go to knock on a 
[15:29]
thousand doors of people in your neighborhood and say hey can you each lend us a thousand dollars or whatever the number has to be to make it work out right and we'll pay you back a little bit each month right because then that particular couple they lose their jobs or they skip town or whatever you've lost all your savings if you were the one lending them all your money so that's why it makes sense all the savers go through some of these central institutions that then disperse the money and so that's how they deal with risk all right so that is totally compatible consistent with 100% 
[16:00]
reserve banking it's just the people for example who buy a CD and then give funds to the bank that then it lends it out they would know they can't show up next Tuesday and get access to their money right that's that's not the arrangement they had with the bank if the bank is doing that though it does somehow have to come up with compensation it has to charge for the cost of running the 100% reserve system okay another element of this debate is fraud versus economic 
[16:32]
consequences so rothbard and some people in that tradition example DeSoto hapa block they they think it's important in order to get people to see the weirdness or live fractional reserve banking just doesn't make any sense they want to show that it's inherently fraudulent they're in there so they argue that there's a sense in which it's multiple people with claims on the same piece of property right so you you put your thousand dollars into a bank into a checking account and you think it's 
[17:04]
yours and then if the bank goes and lends out nine hundred of it to somebody else you're still walking around town thinking you have $1,000 in the bank and yet somebody else now thinks he or she has nine hundred dollars in the bank and there you're both pointing to the same thousand dollars that's in the vault right that's the idea or maybe they took the nine hundred and gave it to somebody else and they're looking at the current see the green pieces of paper so they think yep this is this is in my possession and yet you're still conducting your operations is if you have the full thousand dollars at your 
[17:35]
disposal right because it's it's available to you upon demand all right so some people in this in this these debates argue that that's nonsensical there's something there's fraud going on there the bank is simultaneously promising to two people you can show up and collect this money if you want we've got it for you when they know in practice they can if there's a bank run you know then the lie is exposed in the bank is caught with its pants down right that's so some people stress that and there's a whole legal history that look 
[18:07]
to Soto gets into about the different the difference between lending something to somebody versus giving to them in a caretaker fashion really if you if you check a coat at your restaurant you know you go into a restaurant there's a coat check and you give them the garment and then they give you a ticket you don't think that actually what they're doing is lending the coat out to other people who need it and they're just saying oh well get will have a garment for here when you come trust us right you see how that works and if you saw that they were doing that you would think so it wouldn't merely be that okay I better 
[18:37]
not show up and give you this ticket and you don't have my coat it's beyond that if you found out that they were lending the coat out to other people you know you see what are you doing okay so that so there's there's that type of arrangement and so de Soto and some others in this tradition argue that historically that's how it should have been handled and then it was government intervention they claimed that we're that you know the bankers had a lot of sway in the legal community and with the with the government and that that's how they got the rulings to be such that it was considered oh when you make a deposit with a bank really what you're 
[19:09]
doing is lending them money so they still owe you money back but the property switches you know title the title switches hands that that's the way the legal ruling went and so people in this tradition argue that it shouldn't have gone that way that that that is nonsensical okay the way the free bankers then counter that is they'll say they'll argue with history and say look if this was a voluntary choice everybody has known for a long time that the bank doesn't you know have your money in a little drawer with 
[19:41]
your name on it everybody knows fractions every baking happens otherwise how could they pay you interest on checking accounts so it's voluntary you know the market has ruled and in history we don't see a lot of hundred percent reserve banks do we and so it shows that doesn't pass the market test all right so I'm just here summarizing some of the back and forth but what I want to stress is that that's when I was younger I thought that was the crux of the debate and what Joe Salerno has stressed is that that's really not the issue when it comes to the business cycle okay so for 
[20:12]
Salerno and I agree with him the really interesting and fruitful part of the discussion as economists because you know we're not legal theorists is to focus on does fractional reserve banking cause the Austrian boom-bust cycle all right and so it's it's not that Salerno is conceding one way or the other on the fraud issue he's just saying let's not focus on that and let's instead as economists focus on this issue of the business cycle and so that's what I have done also and so here it really does I 
[20:43]
think clear up some of the misconceptions and I and so if you were leaning towards the free banker side saying come on it's voluntary you know I don't really how could it be fraudulent if everybody knows what's going on and the hundred percent reservist have a response that by the way so you know hapa or walter block they'll say something like if somebody and we have a voluntary contract if someone agrees that you're gonna give them a hundred dollars and he's going to give you a square circle that's still a nonsensical contract even if it's voluntary right 
[21:13]
cuz a square circle doesn't make any sense so that's you know that's how they deal with that sort of argument but the point is as Salerno says that's we can put that to the side and that's an interesting issue but as economists let's focus on whether or not fractional reserve banking causes the business cycle so here for just a little bit of context before I move on let me just make sure you realize this don't get caught into a trap where if somebody asks you oh so you knew Austrians what do you think about what causes the business cycle if you say the Federal Reserve er if you say 
[21:44]
central bank's caused it then the obvious retort is to say oh well apparently you don't know your history don't you know there were all sorts of don't you know there were all sorts of financial and panics and depressions with a small D like in the United States even before the Federal Reserve and even in periods where there might not have been a National Bank established okay and so strictly spin it and that's correct so strictly speaking the theory of the business cycle that Mises developed in what has been translated as a theory of money and credit is 1912 book that's a theory of how fractional 
[22:17]
reserve banking or what he called the issuance of fiduciary media causes the boom-bust cycle right so central bank's exacerbate the problem but the issues not central banking per se the issue is fiduciary media okay and so this leads into my next point about the new ones position of Mises when I was younger and looking at this debate I thought both sides had great points that you know the so-called free bankers could produce lots of quotes for Mises 
[22:48]
in support of their position so it seemed to me and the anti-free banker Harper sent reservists let's say they also could produce a bunch of quotes from Mises that seemed to support what they were saying and so I concluded at the time that you know Mises either was contradicting himself or that his views just changed you know he had a long career and you know his views changed and that's what I thought was happening but actually within the last several years the more I was studying this and reading the work of Salerno in particular showed me that no on most of 
[23:20]
these issues so I'm putting a question mark here that you maybe somebody can produce a quote that I won't be able to explain in this way but for just about all the ones you know the major ones that ostensibly look like it's Mises praising free banking so he is but it's not because he's admitting that very low reserve requirements are consistent with you know an economy that's free from the business cycle that's not what he's he's claiming if you go and look at a lot of these ones Mises is consistently saying on the one hand that the issuance of 
[23:54]
fiduciary media so fiduciary media just means money that's it's like a ticket that the bank issues that's not backed up by actual money in the vault so it's a claim on money that's not backed up by genuine money in the vault so to issue fiduciary media means to engage in fractional reserve banking so Mises has crystal-clear quotes even in human action right so it's not just when he's younger but even in human action where he says that the issuance of new fiduciary media sets in motion the boom-bust cycle you know period end 
[24:24]
of story and he says now if it's just a little bit then it's gonna be a small business cycle but the point being there's no there's no such thing as is in a correct amount or an amount of fiduciary me that would not set into motion the business cycle all right so he says that explicitly elsewhere in human action he's in favor of what he calls free banking so it looks like what man this guy he's inconsistent if you read it though with this interpretation everything makes perfect sense is that Mises doesn't trust the state at least 
[24:56]
as of his writing and human action elsewhere in his career by the way he does explicitly call for legal requirement of a hundred percent reserves all right so just to show you that even to go so far as that is something that Mises dabbled with at one point in his career where he thought that was the only way to ensure a sound money but for the passages in human action it's clear what he's saying is you can't trust the state right if they even if they insisted on a hundred percent reserve requirement the next time there's a major war and they want 
[25:27]
to run the printing press they would just relax that requirement and so they would tell the banks don't worry you can go ahead and you know issue money above and beyond what you haven't you know issue credit above and beyond what you have from savers giving you in the vault go ahead and do that it's fine so his point was the best way to ensure the long-run stability of the money and banking sector and to prevent the boom-bust cycle which emanates from fractional reserve banking is to just not have the government get involved at all because Mises thought normal market forces would constrain banks so that if 
[26:00]
any one bank expanded too rapidly by lowering its reserve requirements then there would be adverse clearing with respect to the other banks and so pretty soon the reserves of the one bank that was expanding rapidly so let's say all the banks in the community have 95% reserves and then one bank gets reserves and then one bank gets aggressive and lowers its reserve ratio down to 50% so it's issuing more loans it's doing more business it's earning more interest payments so that looks good but the point is that banks customers now they 
[26:30]
have more notes in their possession other things equal then all the other banks customers do so in the course of normal operations there's going to be more notes issued by the expanding Bank than all the other ones so at the end of the week or the month when the bank's all setup with each other the other banks are gonna have more claims on the expanding Bank than vice versa and so on that they're gonna say okay here you know we've got a thousand ounces of gold that you owe us and we only owe you 200 ounces of gold and so you owe us on that 
[27:02]
800 ounces so go ahead and settle up and so the point is that the genuine money stock would flow out of that one expanding bank's vaults in the other so that's why in equilibrium no single bank can expand too rapidly relative to its peers okay and so that I've shown you that one bank can't have significantly lower reserve requirements than everybody else but now why can't all the bank's just as a cartel agree to inflate well as long as it's an unregulated SEC turning or just like it's as open as opening a pizza shop or 
[27:33]
it's as open as opening a pizza shop or something somebody else can set up a bank right so if all the existing banks collude and get together and say let's all agree to lower reserve requirements the 50% will all inflate in unison and so our reserves you know won't get drained from each other because well I'll do it together somebody could just start a new bank that has 60% reserves and then that bank would over time get all of the reserves from the other ones okay so that's that's the kind of logic Mises had in mind and so that's why he was saying as a practical matter the best way to constrain the practice of issuing 
[28:05]
fiduciary media or to keep reserve requirements high is to not have the government be involved with it at all just leave it to genuine market forces because he thought competition would quickly penalize any one bank that tried to expand too rapidly okay notice how central banks do the opposite of what they're supposed to do what would check that's that's feedback mechanism I just walked you through where if all the banks collude together you could just start up a new bank well what if it's hard to open a bank right right now 
[28:37]
it's you can't just open a bank that's that there's all sorts of regulations you have to jump through so that's the way they limit competition and the other problem with expanding too rapidly is if there's a run you get caught with your pants down and so what does the central bank do it's the primary reason for its existence is what it's a lender of last resort that's what it says it's doing so just think through what that means that means when private banks get into trouble and they're illiquid right then 
[29:07]
the central bank comes in and rescues them so again the very things that Mises thought in the market would penalize overly aggressive expansion on the part of the banks that's what the central bank by its very nature dismantles or minimizes okay so you see how it's the opposite of what you think that the public has been taught the central bank weeds out you know fly-by-night organizations and keeps the public using sound currency when it's the other way around but in terms of this debate what I'm saying is certainly in human action 
[29:39]
the other ones that have been brought to my attention when Mises at times praises free banking it's not because he's saying fractional reserve banking is actually benign in and promotes coordination and the loan markets that's not what he's saying he's just saying that that's the best way practically - in other words don't trust the government to maintain 100% reserves because you can't trust them to do that okay the one last thing I'll say this before moving on is it gets a little bit subtle but Mises does at times admit 
[30:10]
that if it weren't for fractional reserve banking the purchasing power of money would have risen rapidly at certain points in history like as more people started using gold over the you know over the earth that that would have increased the purchasing power of gold so there would have been price deflation measured in gold ounces except for the credit expansion that fraction reserve banking offered so it best you can put that as one of the things in favor of fractional reserve banking to be held up against the fact that it causes the business cycle so I still have not seen 
[30:42]
anybody showing me quotes from Mises saying that doesn't cause the business cycle incidentally maybe Mises was wrong right so this isn't a definitive knockdown argument but my point is it's not merely some crank --is-- thing that murray rothbard believed that the the position that salerno's advancing here that fractional reserve banking per se is what causes the Austrian boom-bust cycle with something that Mises himself I think pretty clearly developed and believed in and since Mises developed Austrian business cycle theory that's a pretty 
[31:13]
good indication that you know the two are linked okay so what is the free banker response on this this type of issue so Celgene at all they argue that under free banking it's a pretty subtle point and and so if you're really into this stuff I encourage you to read out and this literature and see it because this was more nuanced than I initially thought going into it and so what he argues is that they only issue additional fiduciary media when the 
[31:44]
community wants to save more okay so let me just take a minute here we still got plenty of time let me just make sure you get his argument so the claim is again what's fiduciary media it's let's let's imagine it's gold Gold is the money in this economy and so prices are quoted in ounces of gold or you know pounds of gold what-have-you and there's banks that are private right we're imagining a free society here there's no political system so there's free banks they're private and they issue claims on the gold right so rather 
[32:16]
than walking around with ten pounds of gold on you which is heavy you have pieces of paper that's saying the the bearer of this note is entitled to one ounce of gold let's say all right and you got a bunch of those things in your pocket or you have a checking account you have a checkbook you can write checks on and so what Celgene and white and these people are arguing is to say the only situation in which the private banks would find it profitable to print up more of these tickets and issue them as loans into the community and thereby 
[32:50]
lower the rate of interest right so that's what Mises is saying would set up the boom-bust cycle that the banks they issue more fiduciary media it's not backed up by genuine saving in order to backed up by genuine saving in order to advance that those more loans out there the rate of interest comes down it's not the correct interest rate it sets up an artificial boom and then when the banks chickened out and stopped pumping in so much extra credit the bust happens right so that's Mises position the way the free bankers counter that is they say no actually the only time if you run 
[33:21]
through the logic and you see what are the incentives facing a commercial bank in this type of system that they're envisioning theirs and the only time they would want to issue more fiduciary media and thereby push down the rate of interest is when people in the community want to save more so they're agreeing that yes if you have an initial equilibrium and then all of a sudden the banks went to lower reserve ratios and print up more tickets even there's not more gold in the vault so there's more people in the community holding tickets 
[33:51]
saying you know do the owner of this ticket can go to Acme bank at any branch and get an ounce of gold there's more of those tickets now that the community is holding in the in order to get that flow to go out there the rate of interest dropped so somebody like salerno or me would say aussie issuing more fiduciary media pushed down the rate of interest even though there wasn't saving it wasn't that people deposited more gold with the banks there's the business cycle right that's the wrong rate of interest that's not the natural race to lows artificially low sets up the 
[34:21]
boom-bust cycle in the free banker responses no the very act of someone in the community choosing to hold more notes issued by Acme Bank or whatever is implicitly the owner of that note or the holder that note making a loan to the bank all right so it's a very clever argument so if it were correct I think it would it would go through right in other words they would have shown in their type of system the only time the banks would issue more fiduciary didn't lower the rate of interest is when the 
[34:52]
community voluntarily saved more and again the bank which is being intermediary so that's what they're trying to do so it's a very clever approach I just don't think it it doesn't make sense to me economically I don't think it's correct so one thing is and I'll show you a paper here at the end if you want to go see the source Mises explicitly dealt with that type of argument in 1912 in the theory of money and credit and he said some people think that holding fiduciary media involves an implicit loan lending of funds to the bank it Misha says that's not correct and so his argument is if 
[35:24]
I'm holding a note like from Acme bankers let's say Citibank that says the owner of this can present it at any citi bank and get an ounce of gold upon demand and so the free bankers are arguing that there I've implicitly lent the ounce of gold to Citibank right because I could go get it but I'm choosing not to so its remaining in their possession as I walk around town with this note rather than going and turning it in and getting the the gold outs so they're saying in a sense I'm lent Citibank the gold ounce and so 
[35:55]
therefore the interest rate should have fallen because I just engaged in more lending but what Mises is arguing is that no when you understand what fiduciary media is in how it is it is accepted by most people in the community at par with the genuine underlying base money then you realize it's not a loan okay and this is this is why Mises goes through the whole thing I'm not gonna we don't have time and also I don't want to bore you too much here but why Mises developed this notion of fiduciary media okay and so it's claims on money that 
[36:28]
are instantly redeemable and that the community accepts as being interchangeable with money but it's not actually money proper that's what fiduciary media are and why did he develop that because he thought this was necessary to understand the business cycle because what happens is the weird thing about claims on banks at least reputable ones is that the public treats those things is basically interchangeable with actual money so when you're walking around a developed market economy with notes from Citibank saying the owner of this is entitled to 
[36:58]
an ounce of gold you can go into the store and spend it just as well as you can spend the actual gold ounces okay and so the point is you're not actually making a loan to the bank because you still have a present good anything that having the actual gold in your possession would entitle you to all right you know any services it provides by having gold and your cash balances is also satisfied by holding fiduciary media okay and so so don't don't get lost here because this people people 
[37:29]
getting arguments there's a dispute about whether acquiring larger cash balances constitutes saving and that question is not relevant to the particular one here what the free bankers need to argue is that you've got cash in your you know you've got gold in your possession and and I agree that by adding that to your cash balances you're saving you know like I say the amounts of golds and I have an extra ounce of gold of my cash balances and now if I go 
[38:00]
and give it to a bank and they give me a note saying the owner of this note can get a an ounce of gold that that's an additional act of saving on top of it because that's what they need that's what they would need to argue and I'm saying that that doesn't follow all right that just swapping the form in which you're in which you're holding your cash doesn't constitute an additional act of saving and so that shouldn't further push down the rate of interest and I have a little reductio ad absurdum so in the free banker vision or world view why would it be good how does 
[38:32]
it promote coordination or equilibration like they say you could have a situation where imagine everybody all of a sudden wants to save more they want to hold more cash they get fearful for the future under 100% reserve banking this would they claim lead to a painful adjustment process where people don't want to spend as much they reduced their spending because they're trying to build up their cash balances and so prices would have to come down and more gold would have to be mined right if we're a hundred percent reserve community that 
[39:03]
uses gold as the money if all of a sudden everybody wanted to double the amount of gold in his or her possession then what happens is a combination of more gold gets mined in prices quoted and gold come down until the point at which that you know the real purchasing power of your gold holdings has doubled for everybody and they're saying that's that's a painful process what if instead the banks could just print more tickets right and then that would satisfy everybody would have more you know their purchasing power measured in terms of 
[39:33]
gold and tickets would go up we don't have to go and go the costly method of digging up more gold and we don't have to wait for the painful sluggish process of prices because prices are sticky they just are and that's you know that's their argument and so as I pointed out what's weird in that situation just if you go through their logic is if you said okay let's imagine that it's a situation where everybody just wants to double his or her holdings and the bank's just print up more tickets and so everybody 
[40:04]
just gets more tickets so now everyone has twice as much gold measured in you know tickets that they borrowed from the bank and now I say okay how did that haven't that you know that pushes down interest rates isn't that going to cause the boom-bust cycle or so you know because they're implicitly making a loan and so if you think it through how is it possible that everybody in the community all of a sudden had more tickets is because everybody lent himself that extra money right you see that and so if you say to some where'd you get those tickets from you'd say oh I lent it to 
[40:35]
myself and that's how you doubled your cash holdings all right and so it's when you think it through that way you realize wait there's something screwy there that can't be right okay whereas when it's just one-off things and one person you know is holding the notes and maybe you could see it and somebody else borrowed it because normally the bank expands and some business will borrow the notes spend it and then someone else in the community will be the reservoir well that note will end up and they'll hold and they'll add it to their cash balances and so the free bankers argue oh that person where it landed implicitly lent the money to the 
[41:06]
expanding business owner but when I make it symmetrical like that where everyone the community just expands as his or her cash holdings which the banking system accommodates by printing up more tickets you can see that you know that that process doesn't work that means everybody implicitly lent himself the extra funds available to bolster as cash balances that doesn't make any sense and certainly you know you're not creating genuine savings through that all right so that's the way I would handle that particular claim another claim that Celgene often dwells on is pointing at 
[41:38]
the historical successes of the free banker vision and the two he singles out are Scotland and Canada and so again I'm not putting words as mouths clearly you can go and if you read the paper I'll link to at the end here you'll see that Celgene holds these up is the best examples historically of free banking in action and so that's ironic because as Murray Rothbard detailed Scotland's suspended specie Redemption for more than a decade okay and so again what 
[42:09]
that means is during the period that the free bankers point at Scotland and say this is a good example you know nothing's perfect but this is a good example of our principles and operation you can see it working here that the Scottish banks if you showed up and said yeah I have gold on deposit with you you see here it is here's the receipt I like my gold please they would say no you have notes from us that should be good enough for now and it wasn't just that they suspended Redemption for a week or two again it was for a long period of time and that happened during the 
[42:40]
alleged period of the you know the free banker success story as far as Canada Celgene pointed to and when his blog post this book on Canadian banking history saying this outlines how great the Canadian system worked at least when it first started before you know there was more and more political intervention but again in Celgene gives these years for when the banking system in Canada approximated his free banking ideals and said it was remarkably stable so I went and looked up you know I went and pulled 
[43:11]
the book up and I saw so this is the book he was talking about in this the chapter dealing with the time period in question this is what it says so its banking under the Confederation the expansion between 1867 and 73 then depression then bank failures and losses okay and so it's food which is ironic because this is if Murray Rothbard wanted to point to historical example to show this is the danger of unrestrained fractional reserve banking this is the 
[43:42]
poster child this is literally exactly what the hundred percent reservists say would happen is that all yeah there's an expansion there's as a parent prosperity but then there's an economic crash and then there's bankrupt failures that's exactly what it does here and so and with some of the back and forth the last thing I'll leave you with here is for more reading so I the stuff I'm drawn on this talk I had to come out a recent paper in the qje in the spring of 2019 more than quibbles problems theory and history of fractional-reserve free banking if you want to see more of 
[44:13]
this and just so he doesn't think I'm ignoring him so Celgene did respond to when to this talk I just gave he had an earlier response to that which you can see if he just you know Google Bob Murphy on free banking in Canada you'll see but if you go look at it you know it's not that I'm ignoring it it's not it's that we're talking past each other like what Celgene does is just point out oh well there's certain other things that we're good in the Canadian system like the allocated credit and went and that's difficult to quantify number one but also that's not really what the claim was that the the 
[44:44]
Rothbard Ian type claim that I think goes back to Mises is that fractional reserve banking per se causes the business cycle the boom-bust cycle because you're when banks lend money that hasn't first been deposited with them from savers they're in a sense acting as if there's more savings and there really are that pushes down interest rates that's not the correct interest rate and that causes the boom-bust cycle or at least that's the claim and so to point to an example where there was clearly a boom bust cycle right after this system was instituted is entirely consistent with 
[45:15]
that so Celgene doesn't go through and try to explain why it doesn't cause the boom-bust cycle he just you know points to other issues so partly it's disappointing because we're talking past each other the last thing I'll mention is one of the things Celgene does is he'll contrast the US experience with the Canadian experience and it's true the u.s. like during the 1930s there were a lot of bank failures in the u.s. there weren't in Canada and that has to do with various restrictions like on what's called unit banking laws in the 
[45:46]
United States so what Celgene can do is show systems that had a lot more government intervention than the places that he's holding up his ideal free banking scenarios had a lot worse things happen in their financial system yeah of course that's true right just like I wouldn't but but it's like saying price controls aren't a big deal because look at New York City right now look at the price controls would you rather live in New York City or the Soviet Union right you 
[46:18]
see is it I'm saying that doesn't exonerate price controls it just means yeah that by itself isn't as bad as yeah that by itself isn't as bad as outright full-blown central planning so likewise if Celgene is pointing to a country that had fractional reserve banking backed up by government privileges and cartels for the banks and also had restrictions on you know branch banking or had other sorts of things that the banks had to buy government bonds where yeah that's gonna be worse than a place that's a free banking ideal but as we've seen even the place he holds up as they deal they still suspend specie Redemption in 
[46:49]
the other example they still have depression and bank failures okay that's my time thanks everybody my time thanks everybody [Applause]