Does Fractional Reserve Banking Pose a Threat to the Economy? Watch the Livestream.

Economists Robert Murphy and George Selgin face off at the Soho Forum.

At tonight's Soho Forum, economists George Selgin and Robert Murphy are debating fractional reserve banking.

The proposition: "Fractional reserve banking, whether practiced under a gold standard or in a modern fiat-money system, poses a threat to the stability of market economies." Murphy is arguing the affirmative, and Selgin the negative.

It's an Oxford-style debate, so audience members vote before and after the event, and the contestant who convinces the most people to switch sides wins.

Open the show is libertarian comedian Dave Smith. Watch below, or click on the link and submit a question in the Facebook comments. We'll read aloud a few of the best during the Q&A.

Comments

[Diane Reynolds (Paul.)]

"Fractional Reserve" was my nickname in anger management class.

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[sage]

Your mom poses a threat to the economy.

[Eidde]

Yo mama so fat, she bends the cost curve.

[BestUsedCarSales]

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[Eidde]

Yo mama so dumb, she thinks a business cycle is what you ride to the store.

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[Eidde]

Yo mama so confused, she doesn't believe in econometrics because she doesn't use the metric system.

[BestUsedCarSales]

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[Charles Easterly]

Watch below....

Alas, Mr. Epstein, there is not a link visible below your article.

[Eidde]

It's two guys defending opposite viewpoints, so they cancel each other out, which on your computer results in a blank space.

[DJF]

Science, isn't it amazing!

[Charles Easterly]

Science is understandable for many of us.

The lack of the appropriate link in this particular context remains inexplicable to me.

[Jerryskids]

I get a black box with a notice that the video can't be imbedded and to go to Facebook to watch it. I get the same thing with Twitter links. Well, not the exact same thing, Twitter doesn't tell me to go to Facebook to watch the video. But the same effect - my browser doesn't go to those sketchy sorts of neighborhoods.

[gormadoc]

I very much respect George Selgin. I read his early works in high school, which is an odd choice of reading material for a high schooler, come to think of it.

[Brandybuck]

I sometimes ponder how much smarter I would be today if I had read George Selgin in high school.

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[Chipper Morning Baculum]

Excellent debate. I listened to the whole thing and I have much respect for both of these gentlemen. In the end, I think George Selgin had the better arguments. There is a fundamental problem with Bob's position: namely it appears to be an anti-free market position. It boils down to this: in an unregulated market, would banks tend toward full reserve banking? He thinks yes, but I just don't see how this is possible. First of all, people in general recognize that bank deposits are not bailments, but on-demand loans. So I don't think there is a fraud issue. Would customers prefer banks with a reserve close to 100%? No, because fees would be higher and such banks would be out-competed by banks with lower reserves based on higher returns on loans.

So, if you make the claim that fractional reserve banking is destabilizing to the economy, and if it is clear that in a free market reserves would not tend to approach 100%, you are claiming that a free market economy is naturally unstable and requires government intervention.

[Scarecrow Repair & Chippering]

Somewhere I read that before the Fed in 1913, banks used to advertise who their directors were, what their reserves were, and generally brag about how safe they were. This was not just in whatever the rich read, but in mass market newspapers.

They wouldn't do that unless it was useful. It wouldn't have been useful if it didn't affect where ordinary people banked. I doubt the very poor had any need for banks, but the growing middle class surely did. If they paid attention to that kind of banking information, people today would also, at least enough for it to matter.

[FreddyB]

That's interesting. I wonder if banking would have innovated new ways to deal with demand deposits and bank runs in the absence of the current system. Would there be deposit rates indexed to loan ratios or something like that?

[Scarecrow Repair & Chippering]

The 1907 panic was triggered by three things: the British-German naval arms race; rebuilding San Francisco after the earthquake and fire; and the twice-yearly migration of money between farms and cities (farmers needed money in the spring for planting and produced money in the fall from the harvest).

The bureaucracy caused the Panic through two measures: the banning of branch banking meant banks were really slow at shifting money to where it was needed; and the feds required all banks to have federal deposits for all their assets, initially a way to raise revenue for the Civil War 45 years prior, but kept in place because revenue.

Canadian banks did not have the same stupid regulations, and did not fail, either in the Panic of 1907 or during the Great Depression, while thousands of US banks did.

More proof that government is incompetent and the root of evil. Everywhere you look, you find government at the core of incompetent business practices, either because they write stupid laws and regulations, or because they breed corrupt cronies. Businesses can easily be just as incompetent as government bureaucrats, but businesses can fail and provide accountability and salutary lessons. Government cannot fail; their bureaucrats cover up, blame business, and expand their empires with new regulations.

[Old Mexican - Mostly Harmless]

Re: Chipper Morning Baculum,

He [Robert] thinks yes, but I just don't see how this is possible.

Banks with full reserves would fail at a much, much lower rate (taking into account the occasional bank robbery or fraud) than banks that do not hold full reserves. The possibility of failure and higher risk would make it more expensive for fractional reserve banks to insure themselves or obtain emergency reserves at good terms.

Ergo, an unhampered market will tend towards non-fractional reserve banks more than fractional reserve banks. The reason why banks take more risk today is because of government intervention and the special protections that the State affords them.

you are claiming that a free market economy is naturally unstable and requires government intervention.

Your conclusion is specious. You are leaving aside the fact that fractional reserve banks are protected from failure by government by spreading the risk on us unsuspecting tax payers. In other words: you're stating things exactly backwards. It's government intervention which makes markets unstable by removing certainty from banking, not by adding it.

[Scarecrow Repair & Chippering]

You are assuming a binary world: fractional reserve banks fail, full reserve banks do not. More likely is that fractional reserve banks would learn from failures and adjust their practices to a new equilibrium demanded by the public: some small increased risk of failure, for better interest rates. Some of the public would want maximum security and stick with full reserve banks. Some would want higher rates and try the riskier fractional reserve banks. Most of the public would settle for minimal risk fractional reserve banks at in-between rates.

[Brandybuck]

"Banks with full reserves would fail at a much, much lower rate (taking into account the occasional bank robbery or fraud) than banks that do not hold full reserves"

Banks with full reserves would fail at a much lower rate because they woudn't have any customers. There haven't been any full reserve banks for five hundred years. For reasons having nothing to do with eebil gub'ment.

"Put your money in our bank! We don't pay interest, we charge you for the service! Watch your savings shrink!"

[Brandybuck]

Yes, mandatory full reserves is inherently incompatible with anarcho-capitalism. Which is why it's so bizarre that so many AnCaps demand mandatory full reserves.

"Smash the state! Except that tiny piece of it over there that imprisons bankers for engaging in voluntary economic transactions. We still need that part."

Even if they were right about the inflationaly effects of fraction reserve banking (they are not), it would still be an externality and there are other ways to deal with externalities than to outright back the primary activity.

[The Last American Hero]

If the Feds didn't bail out failed banks, there would be no threat posed by the fractional reserve system.

But we can't seem to get rid of the bailout system, so if the C suite had their own financial asse(t)s on the line in the event of a failure, there would far fewer failures. If a guy is worth $500million if his bank fails and $3 billion if his risky loans pay off, then he has no real skin in the game. If he knows that if the bank fails he will lose everything, he may be more mindful of taking on excess risk.

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