A debate between Joe Salerno and Steve Horwitz (and Larry White) has recently reignited the debate between 100% reserve advocates and free bankers. To catch up, see:
Larry White:
Steve Horwtiz:
- Reply to Salerno's Four Propositions on Mises and the Free Banking School 17/5
- Ebeling and Selgin Contra Salerno on Mises and 100% Reserves 17/5
- Is Expanding the Money Supply Costless for Free Banks? 16/5
- Selgin
Contra Horwitz and White on Mises’s View
of Fiduciary Media 16/5
- White contra Mises on Fiduciary Media 14/5
I confess that I haven't read each article in detail, and the substantial comments that inevitably follow. In my experience the comments these debates attract suffer from a severe selection problem, and whilst my own understanding of these issues has been significantly shaped through internet debate, there is a lot of chaff.
Given that the issue is hot, I've put a working paper on SSRN. It's my attempt to reflect on the "sound money" debate, and put together the various schools of thought. Unlike most discussions, I put the practical issue of solvency at the fore (a point stressed by Toby). It also takes seriously the "second best" proposals of the Chicago school.
Here's the abstract:
Recent work on the debate between fractional vs. 100% reserve banking has concentrated on whether maturity mismatching is fraudulent (Barnett and Block, Journal of Business Ethics, 2009; Bagus and Howden, Journal of Business Ethics, 2009). This paper attempts to shift the discussion from issues of fraud to issues of solvency. Indeed fractional reserve advocates may underestimate the effect on banks of having to exist within the general business law: auditing requirements; margins; and limited liability protection all provide additional constraints on issuance. The nub of the sound money debate rests on whether fractional reserve lending is (i) insolvent; (ii) inflationary; (ii) the driver of boom bust cycles. This article argues that it is none.
You can download the paper here.
Since writing it, I've had another consideration. I've heard people argue for limited purpose banking use an example of gas stations. They say that consumers can only really buy and sell petrol from BP, and quite rightly cannot engage in complex futures contracts. But why not?
Imagine that you are considering booking a holiday, but there is a critical issue that will determine whether or not you will be able to go. At the moment the price is cheap, and you do not want to have to wait before making the booking. Why is it the case that I cannot buy an option? For, say, £50 I attain the right to buy the holiday at a specified price, before a specified term?
I can see why 100% reservers might object - they might argue that widespread public ignorance of personal finance would mean people wouldn't understand the contract. Possibly. But is there a legal restriction that prevents this market from appearing?
I recently needed to book 10 hotel rooms, and was able to "reserve" them for several days. Clearly there is a demand for options, but in this instance I didn't pay a fee (and could only reserve them for a few days). Why couldn't I pay a little extra to "reserve" them for longer?
Imagine such a market did exist. Would it be fraudulent for the travel company, or hotel, to sell more options than rooms? Is it any different to airlines overbooking? Provided it was specified in the contract, wouldn't their be a competitive pressure not to continually disappoint customers? Wouldn't the ability to mange their booking system better actually help customers?
So why no options on holidays?
"Would it be fraudulent for the travel company, or hotel, to sell more options than rooms?"
I don't think so, since I believe that is what Travelodge do. I don't have a problem with that, as long as it is made explicitly clear when booking, and then you can make an informed choice about whether you are happy to take your chance when it could mean you ending up in a strange town with a refund but nowhere to sleep. If the Wikipedia article is correct and Travelodge only "updated their website to confirm" their overbooking policy after a whistleblower went to the BBC, then I think that's pretty dodgy, and I'm not sure how prominently they advertise the fact now. But as long as you are aware of the policy, I don't see a problem.
Posted by: Quinn | May 18, 2010 at 10:40 AM