Daily Bell: Can you please compare Austrian economics and free banking.I must confess that I have never understood why free banking shouldn't be "fractional" reserve banking. As long as people know what the bank is doing and are ok with that, I don't see why "fractional" reserve banking couldn't be the result of free banking.
George Selgin: I suppose that all self-styled Austrian economists favor "free" banking, understood to mean banking with no special government regulations or barriers to entry. However [free-market Austrian economist] Murray Rothbard believed, and his followers continue to believe, that in the absence of special government interference all banks would hold 100-percent reserves – presumably of gold or silver coin or bullion –against any of their notes or deposit balances redeemable on demand.
Daily Bell: You don't hold that view?
George Selgin: Larry and I and other non-Rothbardian students of "free banking" generally take for granted that unrestrained market forces would favor "fractional" reserve banking. The disagreement has given rise to numerous articles from both sides. As these are readily available there's no point in my trying to summarize them.
Daily Bell: It's been a passionate debate because Murray Rothbard has proven a very powerful force in Austrian economics, especially in the US.
George Selgin: I am always shocked when I read some Rothbardian assertion to the effect that "if we had real freedom in banking, banks would be forced to hold 100 percent reserves, or something close to that," as if the question were entirely hypothetical and there was no empirical evidence to draw upon. In fact, there have been many past episodes of free banking, or of banking that was approximately free, and every one of them refutes the claim in question.
Daily Bell: That brings us to Scottish free banking.
George Selgin: In the Scottish free banking system, which flourished from roughly the mid 18th century to the mid-19th, banks often held gold reserves equal to less than 2 percent of their combined notes and demand deposits. Yet the system performed very well, with what were (in comparison to other arrangements both then and since) very meager banknote and deposit-holder losses. The Scottish people were in fact so trusting of their banks that they considered it a nuisance to be handed a gold coin rather than a Scottish banknote.
Tuesday, 20 April 2010
Posted by Paul Walker at 8:16 pm