[extropy-chat] Free Banking FAQ

[Technotranscendence]

On Monday, January 24, 2005 6:23 PM Hal Finney hal at finney.org wrote:
>> I've updated my "Free Banking FAQ" to such an
>> extent that I now consider it no longer under
>> construction.:)  This, of course, does not mean I'll
>> never ever revise it.  The result can be found at:
>>
>> http://uweb1.superlink.net/~neptune/BankFAQ.html
>>
>>  I would appreciate any comments for improving it.
>> Also, if you think there's some question or
>> information I've left out, please let me know, on
>> list or off.
>
> I thought this was good but here are some questions
> and comments to consider for future revisions.

Thanks!  I would've contacted both you and Mike Lorrey earlier -- like a
year or two ago -- so that the final product would be in a better state
now.

> You should make it more clear right up front that
> free banking is fractional reserve banking.  You
> say it is known as "fractional reserve free banking"
> but unfortunately that is slightly ambiguous and could
> be interpreted as meaning that these banks are free
> of fractional reserves, i.e. that they maintain 100%
> reserves.

Yes, I'll have to do something about that.  Part of the problem is -- 
and this is no excuse for me -- that the terminology that seems to have
stuck in the field is "free banking" = "a free market in banking that is
generally fractional reserve."  (It wouldn't disallow full reserve
banks, but then it wouldn't disallow fractional reserves ones either.)
I wish there were a better, widely used term because some people have
even thought the term meant "banking with no charges or costs."  After
all, if I were talking about "free parking," most people wouldn't assume
I'm discussing a free market in parking spaces.:)

> Since many of those suspicious of centralized banking
> also distrust fractional reserve banking, it would be
> better to make it clear that free banking discards the
> government monopoly but allows fractional reserves
> (although of course it does not require them).  Maybe
> you could just move the last question, about fractional
> reserve vs 100% gold reserves, up to nearer the front.

I'll have to consider this last point.  You might be right, but then the
audience here is supposed to be general -- not specifically critics of
the current banking system or those who're already somewhat familiar
with full reserve banking or a free market in banking.

> You have some technical terminology, such as speaking
> of notes trading "at par".  It's not clear what this means.

Good catch.

> You also refer to "notes" and I'm not sure that the average
> person would associate this word with paper money.
> "Banknotes" might be less ambiguous.  Of course it
> depends on whether your audience is assumed to
> already be familiar with financial terminology.

Another good catch.  I should perhaps use banknotes throughout to avoid
any ambiguity and clearly define that I mean by them things like actual
paper money notes.

> A couple of other questions you could address: What
> about the problem that stores would not know which
> currency to denominate their prices in? Or what if you
> don't happen to have the currency in your wallet that a
> store wants to receive?

Good point.  Of course, the answer is no more complicated than how
stores now deal with foreign currencies.  (And there's already
historical examples of how merchants dealt with competing private
currencies.)

> Another point you might make is that we actually have
> a free banking system in the international arena.  There
> is no world government to enforce a global currency.
> Generally each country has its own currency and its
> own banking policies, and currency speculators and
> traders affect the relative prices.  Free banking would
> extend this laissez faire environment to a smaller scale,
> but we can already get a good idea of how it would
> work by witnessing the behavior of international currency flows.

This is only partly correct as each government enforces what's accepted
as legal tender within its borders and, in some cases, even mandates
exchange ratios.

> (Of course, proponents of the idea may object to
> attempts to relate it to reality since it allows for
> objective tests of the strength of free banking!  It's
> much easier rhetorically to support an untested notion
> than one whose strengths and weaknesses are
> exposed before the public eye every day.)

Well, not exactly.  First, there are other real world examples of free
banking, though they're historical.  There's a decent sized literature
to test the theories against.  Free banking theories, as they stand
today, are largely based on looking at the history and drawing
theoretical conclusions from that.  It's actually a reaction to how
previous theories were unable to deal with the actual dating from
various episodes of free banking, when such episodes were considered in
detail.  (A lot of the previous theory on the subject just assumed free
banking didn't work or was unstable because the contemporaneous critics
of it argued that.)

Second, many free banking proponents, such as Kevin Dowd, have argued in
favor of national currencies over regional (i.e., transnational)
currencies like the Euro because they believe the competition is better
even if it's only limited to competing central banks.  (Hayek argued
much the same, but never seems to have happened on the idea of free
banking.)

Third and finally, one good thing about competing currencies in the
world, so far, has been that it has worked to expose bad monetary
policies.  This actually is an argument in favor of free banking since
what works on a global scale should work locally -- and there seem to be
no sound theoretical reasons not to extend competition between national
monies to competition within nations between different monies.

Regards,

Dan
    Note my new URL:
http://uweb1.superlink.net/~neptune/