I just came across this excellent interview with George Selgin on Free Banking. I find it hard to disagree with George on this issue.
Selgin interview on Free Banking
Posted by Lars Christensen on October 20, 2012
https://marketmonetarist.com/2012/10/20/selgin-interview-on-free-banking/
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Yichuan Wang
/ October 20, 2012The video doesn’t seem to be working or me. I’m not too sure why.
John
/ October 22, 2012Hi,
I hope that someone on this blog will provide commentary on the recent IMF paper by Benes & Kumhof, which suggests the abolishment of fractional-reserve banking (among other things). Here is a long summary by Ambrose Evans-Pritchard:
http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html
Perhaps Selgin could respond? Would be greatly appreciated!!
J.V. Dubois
/ October 23, 2012I wonder if you also agree with this (26:20)
“There seems now to be very little doubt for example that the Federal Reserve mismanagement of money contributed to the housing bubble by keeping interests rates too low for a time.”
I think that Scott Sumner, Nick Row and Marcus Nunes would argue almost everything in the sentence – from the fact that interests rates were too low, through the fact that they contributed to the housing bubble to the fact that it was not housing bubble, but tight monetary policy that caused the crises. This alone would invalidate the whole argument.
George also several times used a highly argued concept of banks lending reserves – a pet topic of our MMT friends. His notion that that higher currency demand during Christmas would not eat into reserves that would in turn lead to lower lending is plainly wrong in current setup.
Anyways, I do not think that this proposal has too much merit. It is true that under free banking all currency would be backed up by demand deposits, but that benefit is negligent. If on average the currency stock is approximately 5% and interest rate is 5% (3% inflation + 2% real growth), then we are speaking about seigniorage of approximately 0,25% GDP. Even if we assume that private banks will not eat any of it (which I highly doubt) and they will provide it in full to depositors, government could as well increase taxes by the same amount to finance its expenditures. It is much more likely that those several banks that are strong enough to be issuers will reap most benefit from seigniorage AND people will have to bear higher tax for government to offset decreased income.
And as for how this could benefit poor countries – I dont get it. How would keeping private dollar bank notes help poor countries to develop as opposed for them keeping Central Bank notes (AKA dollars)? The seigniorage would still go to somebody else in USA an not to anyone in that poor country.