Half-way through Rothbard's book, I think I understand his argument. The FED legalizes a banking cartel which acts as a lender of last resort and bails-out banks that are overleveraged (We have seen evidence that this is exactly what it does). The banks, having this ability to pool risk, are able to practice Fraction Reserve Lending to a far greater extent than the free market would allow. Fractional Reserve Lending creates new money and inflates our currency. The FED tries to do this in an orderly manner, but inflation no doubt occurs. Without the FED, banks would not take on the same level of risks. Let me know if you disagree with that line of thinking.
On the flip side, the banks have taken on a greater amount of risk than they would have without the FED. They have lent out 30 bucks for everyone 1 they had in reserve. This money went to entrepreneurs working on computers in their garages, to skyscrapers throughout the country, roads and bridges, Cell-phone networks, etc...
Would we have experienced the progess we have had if the banks could only lend what they had in their reserve? 1 to 1 ratio lending would not have built up the country we have now. Anyone disagree?
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ReplyDelete"Would we have experienced the progess we have had if the banks could only lend what they had in their reserve?"
ReplyDeleteInflation/Fractional-reserve banking does not increase real wealth/real savings/capital, although it does distort and redistribute it.
Real growth comes from real investment. That is what separates a bubble from, well, real growth.
Perhaps instead we should think about the even greater progress that may have come about w/o the Fed-induced boom and bust cycles, and the accompanying costs/setbacks. (I am aware it is the minority that thinks the Fed is largely responsible for that cycle)
I disagree that fractional-reserve lending does not increase real wealth. I put 1 dollar in the bank, they lend 30 dollars to build a bridge, the bridge generates a dollar a year from tolls and the construction company pays interest to the bank. The bank wins, The construction company wins, and commuters win. The only argument is that I lose due to inflation. But really, that is a couple percent decline in my money's value a year, and if I have invested in either banks or construction companies, I would have enjoyed returns in excess of 2%.
ReplyDeleteI still don't think that fractional-reserve lending creates real wealth, in and of itself. The act of using $1 to create $30 does not change anything except for the real value of each and every dollar. The bridges could've been still been built, and the revenue from those bridges still collected. The fractional reserve-created dollars did not increase the amount of available labor, or the amount of materials, etc.
ReplyDeleteI think this is more of a disagreement on what is real wealth. If fractional reserve banking created real wealth then why settle for 30 to 1? why not 300,000 to 1? The only thing fractional reserve lending does is redistribute, because all it does is change the value of each dollar. And as the only real problem with inflation, those who get it first benefit most, because they get to spend it before the overall price level rises.