Rothbardians vs. “Free Bankers” on Fractional Reserve Banking | Robert P. Murphy

Recorded at the Mises Institute in Auburn, Alabama, on July 17, 2018.
Mises University is the world's leading instructional program in the Austrian School of economics, and is the essential training ground for economists who are looking beyond the mainstream.

[@CarrotCakeMake]

Anyone else spend part of their weekend listening to a lecture on fractional reserve banking?

[@EthanNoble]

MEEE! Its raining all weekend so perfect timing

[@sotospeak415]

What else does one do on a weekend?

[@Max-nc4zn]

I used fill my free time listening to podcasts. Now I listen to lectures and audiobooks.

[@PlasmaFuzer]

NERDDDD!!!!!!! Jk I’m here too and these videos/this channel is an invaluable source of information and perspective. Loving it!

[@overkill7990]

36:25 "People think there's more savings than there really are." Not if the concept of fractional reserve banking is explained to them and they consent to it.

[@DiogoVKersting]

That's exactly what I was thinking. The fraudulent part is the part that makes the client believe that that a bank note is as good as the underlying asset, which is just not true. The bank note should be seen by the bank user as a risky financial asset, when comparing with the ownership of the underlying asset. So if the bank user says "I have 100 gold coins in the bank", when he actually has 100 bank X IOUs, he's being swindled. This is the case where I agree with the Rothbardians where something is wrong because two different people think they're owners of the same property. But now, if the user says "I have 100 bank X IOUs, currently worth 100 gold coins", then it should be clear to the user, that the current owner of the gold is the bank, and transforming those notes into gold is a market operation which depends on liquidity. In that case, a bank product of 100% reserves should be more appealing to bank users, which can choose between having risk and getting interest, and having "no risk", but bearing the cost of the gold storage. Now, on the claim that credit expansion generates the business cycle, I believe that is the case, but I don't think credit expansion is an necessarily act of aggression, therefore I don't think it's inherently ilegal. An ancap society could have a rule prohibiting credit expansion, but that rule should be accepted by the banks of such society with some sort of contract. This, as opposed to fraud, which is a violation of property rights, and therefore could be enforced even without the necessity of a contract.

[@PhilosopherRex]

It's fraud as all of society would have to consent to FRB, not just the depositors. This is because FRB drives down interest rates throughout the economy, taking potential interest earning of everyone and giving them to the bankers - a clear means of theft. Also, and as well established, it creates economic instability that everyone is party to.

[@optionaltoaster1]

People consent to put their money in banks today, and many of them are unaware of fractional reserve banking. You can't know how much of your money is actually in the bank at any given time, but you treat it as though all the money you deposited is there even if you know it's not. When you loan out money but keep another account balance the same, it's expanding credit. It's like putting a price ceiling on oil. People will "think there is more oil than there is" because it's kept cheap, so there will be a temporary boom where everyone gets cheap oil, as if there was a higher supply of oil. But then there will be a shortage, or bust, once that stimulated demand uses up all the oil.

[@mytech6779]

The consent that you refer to happens with savings accounts and certificates of deposit, which have very clear transaction limitations. While tradable on the open market, a C.D. is not treated as a demand note and will usually have some discount applied due to risk and time value. Presenting a fractional reserve system as a demand account is inherently fraudulent because it isn't a true on demand situation, it only superficially acts like it when not stressed. (Talking about public customers here, not banking specialists.) There is also inherent fraud in that that the demand notes issued do not have the value that is printed on them, they have a fraction of that value because the bank cannot immediately honor 100% of the notes. At best they must be discounted for time preference, at worst the bank can't collect their loans and the whole fraction of the note disappears. In short, the fraud is in misrepresenting a what is effectively an investment or CD as an actual demand product. This misrepresentation is the core of fractional reserve, without the misrepresentation you are effectivly left with a brokerage.

[@yydd4954]

Idk why Murphy keeps making this stupid statement Looks like he got nothing as usual George Selgin and Lawrence White are Economists of level above from these Frb is fine, it also helps economy

[@soapbxprod]

Joe Salerno's solution to the FRB issue seems to me to be best: banks should be free to compete on the free market by offering different fractional reserve ratios. Small fractional reserve yields high interest to depositors, large FR yields low interest. Risk/reward... let the consumers and vendors of banking services be free to arrive at a mutually agreed upon transaction. Let the Law only provide protection against fraud.

[@LawrenceTimme]

Yes I would also agree with this, you could have a safe account which you pay for, say 50% of your savings, a low risk, low interest, high reserve maybe 40% with a 50% reserve, but 5% interest. Then a high risk account which is very low reserve, bit you get maybe a very high interest rate. I think the main thing is that when you account is displayed, instead of saying you have $4 in your 50% reserve account it should really say a range with $4, but a minimum of $2 will be repaid should there be a major cock up or run.

[@LawrenceTimme]

Doctor evil impression is pretty good.

[@tefazDK]

In a free society, what would stop fractional reserve banks from winning out the competition in the market? They would just have customer's agree through contract to have their money lend out for interests on their deposits while the full reserve banks would charge an interest fee instead. So from the consumers point of view the fractional reserve looks more attractive.

[@xealit]

One answer, that is kind of in the presentation, a free society would not bail out bankrupt banks when they go bust. 100% reserve banks have less probability to become bankrupt. FR banks create the boom-bust cycle and have more risk. Notice, it also means not to bail out *the customers* of the FR banks, those people who agreed to the FR system and ended up believing there are more savings than there really are. But also, here is a very broad brush idea, but I think it gets to something: a free society must have many currencies (banks could issue their own currency), the currency that the 100% reserve banks use will be more stable, while the usual fractional system generates debt and inflates its currency. So, even if in the short term fractional reserve banks look more attractive to the customer and make more profit, they’ll fail in the long term. Or it’s rather like the free bankers suggest: there will be some equilibrium between FR and 100% systems, it will be where the society wants.

[@neuideas]

Nothing would stop them from winning, save for poor money management at each bank. No bank, in their right mind, would engage in 0% reserves. They would fail immediately. If people, on average, sit on, say 5% of their money, and typically spend the rest, then a reserve ratio of 95% (or more) would make sense. Going 100% would cost the bank potential profit, and going lower than that would spark a bank run. On the other hand, if, on average, people sit on 95% of their money and spend the rest, then a reserve ratio of 5% (or more) would make sense. What is the benefit? It frees up resources for investment, and helps to prevent wild price swings due to the deflation/inflation of shifting savings preferences.

[@xealit]

Awesome presentation! Not only it clearly exposes important points, in a logical, therefore-but way, but also it is very well suited for beginners. Just to note it down, because I had to re-scroll through the video to find it, Robert refers to a lecture on the boom-bust cycle: Roger Garrison "Austrian business cycle".

[@occonnerwilderness8923]

Banks should be free to use the Chicago plan or fractional sharing. The Chicago Plan would naturally win out in the market. Just ask people if they want all their money to be on demand or only a fraction and it’s pretty easy to see why, and/or at least higher fractions would be held. A Chicago style bank would probably offer lower APY compared to a fractional bank that loaned money, made higher profits and could pay higher APY. Most people wouldn’t go to a bank with a low fraction share

[@mytech6779]

Fractional reserve with the fraud removed is an investment/loan brokerage service.

[@banderfargoyl]

If FRB is inherently fraudulent then why isn't insurance also fraudulent? An insurer doesn't have the funds to pay off all claims simultaneously.

[@banderfargoyl]

I'll answer my own question. The difference is that insurance companies don't cause the calamities they insure against. But the Rothbardians claim that the practice of FRB causes the conditions that ultimately result in bank runs. I think the Selginites would counter that every failed business leaves creditors holding the bag.

[@rustyrusky]

These are not equivalent. When you make a deposit you can damand it back at any time. When you take out an insurance the insurer is only obliged to pay once the event you insured for occured. In the first case you decide whenever you want to take out your money at your own discretion, in the second case you can only claim that money once that specific event happens, which is always external (you cannot take out fire insurance on a house and then set it on fire, claiming the money).

[@banderfargoyl]

rustyrusky I didn't say that FRB was the same thing as insurance. My point was that if all the insured submit a claim at the same time, the insurance company can't pay them all off.

[@rustyrusky]

But you don't get to decide when you make that claim. If you did, then the money was already yours before the claim. The fraud is that multiple people have a claim on the same money at any time. In case of an insurance you don't.

[@banderfargoyl]

rustyrusky If every insured suffers a loss at the same time, are not these people entitled to payment in the amount of their policies just as much as a depositor is entitled to payment the amount of his balance?

[@rustyrusky]

I was checking for this video every day since the event started.

[@binder946]

9:34 proponents of increased reserve requirements for banks.

[@binder946]

Presentation related to reserves start at 19:55

[@binder946]

But then why aren't bank allowed to be liquidated in case of bank runs or losses to the bank. It's not really free competition.

[@brianbob7514]

It is like the uncertainty principle in quantum physics. The money is in a superposition.

[@texas77563]

maybe banks can be regulated to keep 50% instead of 10%

[@noyb154]

I don't care what happens when markets are free from coercion. Yeah, credit is risky. Duh. And systemic (forced by government) credit is even worse. And yeah, banks should uphold their contract with a customer when they are tasked with holding 100% on deposit. Banking accountability and transparency enhancement technology would obviously need to be (and therefore would be) developed, if they were allowed to be developed via open competition. Or...be your own bank /cough bitcoin.

[@soapbxprod]

Joe Salerno's solution to the FRB issue seems to me to be best: banks should be free to compete on the free market by offering different fractional reserve ratios. Small fractional reserve yields high interest to depositors, large FR yields low interest. Risk/reward... let the consumers and vendors of banking services be free to arrive at a mutually agreed upon transaction. Let the Law only provide protection against fraud.

[@EvansEasyJapanese]

Great great great stuff. Thanks a lot

[@tomphillpotts]

Very unclear presentation. Look elsewhere for better information.

[@overkill7990]

23:57 But if I want *my* 1000 dollars back, all I have to do is go back to the bank and withdrawal it and it will still be there. Because in total, people only ever want to withdraw a small amount of money from the bank vs. the amount that's deposited. That's the point.

[@robertkaufman1406]

Yes, your money will /probably/ be available. Very, very highly probably if we are not in the middle of a crisis or something. However, in my opinion, the practice is still fraudulent. In total, the bank has made a number of promises that cannot all be fulfilled. Really, any argument that relies on probabilities is not disputing the fraud, but instead saying they probably won't get caught! What if a bank employee embezzled (stole) some money from their employer to pay their bills, but later, secretly paid back the bank. Was that a crime? No one was hurt in the end. But of course that is a crime, and the fact that they got away with it does not change that.

[@austinbyrd4164]

If you sign up knowing the risks agreeing to the fact that you may not get your money, then idc what happens to you. I'm going to banks that have full reserves.

[@huntervolcan9218]

When was fractional reserve lending legalized in America? Was it in 1913 when the Fed was created? Or before or after??

[@NullVoid960]

Yes, At Jekyll Island the Federal Bank was Est. 1913 by Nelson Aldrich who was connected deeply with the Morgan's and Rockefellers. However, this first iteration is not the one we know today, the one we know today was modified from the Aldrich Plan by Carter Glass who drew up the Fraction Reserve System which predicates itself on monetized debt, Inflation and expanded credit.

[@NullVoid960]

I Recommend G. Edward Griffin Creature From Jekyll Island for a detailed history of it

[@sev2100]

No, the first fractional reserve bank in the US was the Bank of North America in 1781.

[@NullVoid960]

I personally separate the 1st Bank of the U.S 1791 and 2nd Bank of the U.S in 1816 since they were operating on a much different schema than the one made in Wilson's Administration. The closest to ours comparatively would be the unconstitutional National Bank Act 1863/1864 that Lincoln signed which created a central banking system. But your correction was entirely warranted, Thank you.

[@huntervolcan9218]

No, the Federal Reserve is different from fractional reserve banking. They both do the same thing, create currency, but fractional reserve banking is done by the private banks, and not the Fed. So, it wasn't necessarily created when the fed was created.

[@JonathanSchattke]

I always refute a position by showing an example of exactly the behavior my opponent expects. it throws them off, you can tell by the puzzled looks they give you!

[@generalsalami8875]

Why not just adopt crypto? You no longer have to worry about ious.

[@justinjozokos1699]

32:59

[@TheGerogero]

Richard Werner has shown that the condition is worse than fractional reserve banking. Banks actually need zero reserves to create credit: it literally comes from nowhere.

[@ozowen904]

These 47 minutes could’ve been more concise and integrated, and more profound, if he abandoned the slide show, and stopped giving so much time to people he did not agree with and stop talking about footnotes.

[@jsallerson]

He’s really skilled at talking around the point.

[@jimgrieser9381]

-31:01 2 main services of banks -24:09 why fractional reserve banking is fraudulent -19:44 economic consequences of "fiduciary media" -11:21 what is the boom and bust cycle

[@adrianomattia5625]

I am for Fractional Reserve Banking

[@sotospeak415]

Adriano Mattia, Henry Luke Ford, good to know...

[@ardacanseven3041]

In every conference or presentation he makes, he talks about how the old Murphy supported this argument, but now the new Murphy found the right way. So, he used to be a supporter of both free-banking system and new-keynesian economics and some other things as well. Certain austrian economists are just unbearable.

[@Trunks9Thousand]

Is there a video about Murphy vs Selgin?

[@Trunks9Thousand]

kzbin.info/www/bejne/i3WvdJRtosZ6kKM

[@yydd4954]

Yes

[@yydd4954]

Murphy isn't anywhere near to stand alongside Selgin though

[@erastvandoren]

Unbelievably wrong! Money is created at the moment of lending it out. And most of the time banks don't need additional reserves for that. In UK the reserves requirements are almost zero anyway. And if a bank needs some reserves - it buys it at the end of the day. FRB does not exist.

[@cocktailbarbelltender8067]

Banks in the U.K are required to hold 10% of their money as true liquid reserves. Saying that 10% is 'almost zero' is untrue. I understand you were using overkill to labour the point, but it's a big difference.

[@-whackd]

Why 100% reserve banking? Just hold your own money in crypto, then you don't need a bank.

[@guy936]

Too bad he's only getting to the nitty gritty from 36:00 on.

[@ryano4227]

Just For Men, Murphy. Try it

[@edwaggonersr.7446]

The master speaks. Compared to you Tom Woods is out of his league.

[@noyb154]

He has better humor and perhaps a more animated speaking style, but both are great.

[@matthewhartley3147]

Not a fair comparison, Tom only does this stuff as a hobby in his spare time

[@edwaggonersr.7446]

I was kidding. Tom is pretty special.

[@ProlificThreadworm]

They are in pretty different leagues tho

[@Mantorok]

Tom is way more accesible.

[@Mujangga]

You mean exactly he same way Austrians inflict their voice when they say "Milton Friedman" and call people "Statists"?

[@timsteinkamp2245]

I just do not care for your presentation. I wanted to listen to the difference and you end up telling us to read other books and papers. You took 20 minutes just to explain what a bank is. I think you may have ADHD, as I think I must have it, the way you constantly change the subject to give us examples of some obscure reference that you understand, but I have to change my train of thought and try to figure out what you mean and then go back to the issue at hand. It is frustrating. It is like when your driving down the road and your passenger is telling you to look over there or look over here. That gets tiring. I'm still wondering if fractional reserve banking is borrowing the deposit less the interest owed or borrowing made up money less the interest owed and then destroying the money when it is repaid. Or if all the interest charged in the banking loan process and hence the interest paid to the savers can ever be recouped. Which is why it is said the deficit can never be paid off. In the beginning you referenced Tom which I suppose is Tom Woods. He does the same thing in his lectures. You should really review your lectures and see if you feel you have given the best for your audience to understand these concepts. Your audience does realize these can be complicated subjects. I wasted 45 minutes plus the time to write my comment.

[@huntervolcan9218]

Fractional Reserve Banking is when banks create currency. They are only allowed to create 90% of your deposit (depending on what the reserve ratio is at the time) to someone in a loan. So, if you deposit $100 into your bank account. The bank is legally allowed to create $90 out of thin air and loan it to someone in the form of a loan. Then they collect interest payments on that loan. So, they are basically making money from giving the public nothing. So, yes, the private banks create currency through fractional reserve banking. And if you want an outstanding explanation of fractional reserve banking and the U.S. monetary system as a whole, watch Mike Maloney's "Hidden Secrets of Money" series, episode 4. Trust me, it will well be worth your time. It answered every question I had about the mechanics of the U.S. Monetary system, including fractional reserve banking.

[@timsteinkamp2245]

It seems we are all still a little confused on this. What I know is my Credit Union deposit earned 2% in 2008 and now it earns .1% so it seems my deposit is meaningless to the Credit Union.They really want customers to bounce checks as they are more profitable. Plus credit unions also sell mortgages to the after market just like the commercial banks so there are many confusing parts of this scheme.

[@soapbxprod]

Get off of KZbin and READ some ECON BOOKS, twit. Stop wasting everyone's time here.

[@Mujangga]

Economists who wished they could have been entertainers and fail at both.

[@Mujangga]

@@soapbxprod How is he wasting anyone's time...?

[@bungeebones]

With the advent of cryptocurrency comes the introduction into the equation of "wallets" for digital money also. An often overlooked aspect and probably the terminal cancer of the fiat money system is the fact that 99% of domestic fiat money exists solely as digital money. Digital fiat money can't be withdrawn (because there are no "wallets" for fiat digital money. That will be a major driver towards crypto currency once the general population realizes most money isn't even worthless paper and that at the slightest "bank run" the banks will run out of paper. The idea of "fractional reserves" is no longer a factor when 99% of "money" exists solely as digits on a ledger. As we saw in 2008, the "balance sheets" of the banks can be "bolstered" with a keystroke. Not only are the 'reserves" worthless digits but the "money" they lend out is also worthless digits as well. Digital money created out of thin air has no credible claim to legitimate interest and once the general economy realizes the fact the money is purely digital they realize there is no moral hazard to defaulting because the lender can be restored with a stroke of a key board. The next "banks runs" therefore will just be massive and flagrant defaults on all debts in a massive wave of public outcry against debt (whether the bank has 'reserves" or not).

[@Mujangga]

A certain amount of money is non-cash because people prefer it e.g. long-distance transactions and large amount transactions. If people wanted more cash, it would be provided.

[@se7ensnakes]

What the hell is this guy talking about? THERE IS NO SUCH A THING AS FRACTIONAL RESERVE LENDING. Fractional Reserve Banking only applies to Loan to the bank and not loans from the bank. Mises institution is misinforming you, Simple arithmetic will prove that banks cannot lend from deposits.

[@Mujangga]

If the arithmetic is so simple, then please provide it.