That Old-fashioned, A Priori History
Now, whatever one thinks of Mises view of economics as an a priori science, one must give him this: He never for a moment thought that history was an a priori science. But many of his followers are far less astute. Oh, the many times I've been in some Internet discussion and seen some Mises epigone write, "Well, it seems logical to assume the [Jefferson / Lincoln / Lenin / whoever ] did not..."
It seems logical?! That's how you're doing history? Well, here is an example I came across today:
'To be sure, fractional-reserve banking is not, as Mr. Wolf notes, "a natural consequence of market forces." It is a result of, and has been upheld by, government law.'
Now, of course, in one sense, shops and private farms and many other market institutions are "the result of, and have been upheld by, government law." But that meaning is trivial. No, Mr. Polleit seems to mean that fractional reserve banking was created by government fiat.
But that is just made up. You only need to go to Wikipedia for about thirty seconds to set that story straight.
Now look, just because someone is in favour of free markets doesn't mean that you have to be in favour of every single thing that arose on a market. Nigerian Internet scams were not developed by any government, but one can still be against them. But it is just ridiculous to make up the history you would like to have happened because it fits with your ideology.
It seems logical?! That's how you're doing history? Well, here is an example I came across today:
'To be sure, fractional-reserve banking is not, as Mr. Wolf notes, "a natural consequence of market forces." It is a result of, and has been upheld by, government law.'
Now, of course, in one sense, shops and private farms and many other market institutions are "the result of, and have been upheld by, government law." But that meaning is trivial. No, Mr. Polleit seems to mean that fractional reserve banking was created by government fiat.
But that is just made up. You only need to go to Wikipedia for about thirty seconds to set that story straight.
Now look, just because someone is in favour of free markets doesn't mean that you have to be in favour of every single thing that arose on a market. Nigerian Internet scams were not developed by any government, but one can still be against them. But it is just ridiculous to make up the history you would like to have happened because it fits with your ideology.
I found the Wikipedia account of origin amongst the goldsmiths unconvincing due simply to the lack of places or dates. The Money facts source isn't much more enlightening. Is it possible it is a bit of a just-so story? Perhaps a better source exists?
ReplyDeleteWell, Crosbie, that's a good point. I've seen that many times before, but I can't recall how well sourced I've encountered it.
ReplyDeleteI tried googling this, but the problem is any search I tried was swamped by anti-FRB people putting forward their own, thought up histories.
Doesn't Selgin's Those Dishonest Goldsmiths have some of the history?
ReplyDeleteYour blog is a breath of fresh air - much better than a lot of other pro-free market/Austrian blogs I have read (I am not sure if you class yourself as an Austrian).
ReplyDeleteSo to be clear, you still oppose FRB?
I find Selgin's article "Those Dishonest Goldsmiths" to be well researched and convincing on the issue of FRB.
Another point is that by 1913 paper currency and bank deposits accounted for 90% of overall currency circulation in the world, and actual gold itself for not much more than 10% (Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds), The Gold Standard in Theory and History, Routledge, London and New York. p.152).
Triffin notes:
"All in all, the nineteenth century could be far more accurately described as the century of an emerging and growing credit-money standard, and of the euthanasia of gold and silver moneys, rather than as the century of the gold standard.” (Triffin 1985: 153).
More on this here:
http://socialdemocracy21stcentury.blogspot.com/2010/06/fractional-reserve-banking-evil.html
I was never anti-FRB.
ReplyDeleteJesus Huerta de Soto (in "Money, Bank Credit, and Economic Cycles", pages 41-53) has a very interesting discussion on the origin of fraction reserve banking. He contends that fractional reserve banking existed as early as the fourth century BC, as he has a record of a lawsuit in Greece where a client of a bank is suing his banker for not being able to return money on deposit. The banker went to great lengths trying to hide the fact, going so far as forging documents and causing "the disappearance of the slaves who had been witnesses" (pg. 45) to the deposit. As well, later that same century, there were several banking crises after war-related bank runs, undoubtedly the result of fraudulent banker behavior (i.e., with disregard to the legal obligation of safekeeping a demand deposit--fractional reserve banking).
ReplyDeleteThe first government to realize and act upon the profitability of banking was that of Ptolemaic Egypt, where the first state bank was created to help fund the state. Ever since, governments have either directly participated in the credit-creation process through their own banks, or granted privileges to banks to help protect them and their interests.
So, in a sense, both Martin Wolf and Thorsten Polleit are wrong. Wolf seems to be implying in his article that the social and economic advantages of fractional reserve banking are of a "natural consequence of market forces", but this false. This is because fractional reserve banking has always led to economic crises, yet before the crisis sets in, bankers (and complicit governments) are in a position to profit handsomely.
And Polleit is wrong simply because fractional reserve banking as a practice began long before governments understood the phenomena. Yet when governments did understand it, they were quick to capitalize and grant special privileges with disregard to standard and traditional law.
"Wolf seems to be implying in his article that the social and economic advantages of fractional reserve banking are of a "natural consequence of market forces", but this false. This is because fractional reserve banking has always led to economic crises..."
ReplyDeleteWell, no. Saying something is a natural consequence of market forces" is NOT the same as saying it is socially advantageous!
And it is false, per Selgin and White's work, that FRB has always led to crises.