d63edbdf_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 41:05
Inevitably the rule of human beings rather than rule of law. Greenspan worried about 9/11 and about the tech crisis went too far; Bernanke, when deciding to bail out Bear Sterns did that in an effort to avoid recession but may have hastened it. What's alternative theory of what business cycles and inflation would look like under free banking? Have to specify the standard--gold standard, silver standard, even fiat dollar created by a Central Bank. Wouldn't need to have an activist Fed. The Fed monopolizes only currency. The Fed's control of that one component gives it leverage over the whole stock. Can't shut down its operations without there being a mismatch of supply and demand. If you allowed banks complete freedom you could simply freeze the monetary base--just keep that stock constant. Need adjustments for currency flowing in from abroad, redeposits in banks. What you really want to freeze is supply of bank reserves. Imagine that the system has evolved so that no more green pieces of paper in circulation, just liabilities in the form of reserve credits. Two forms: Federal reserve notes, dollar bills, about half of which is abroad; rest of monetary base is monetary reserve credits, claims against the Federal Reserve on the Fed's books. Fed is the banker's bank. Bank puts money at the bank; deposit entry at the Fed. Freeze the total of that. Banks can supply the paper currency that people need. The frozen base won't be a problem. Changing needs of the public can be accommodated by the system. Falling price level if productivity positive. Less-than-zero argument. If public wants to accumulate more money and stops spending, don't draw as many checks or pass on their bank notes, decline in the velocity of money, would be a tendency for banks to issue more money, make more loans; their demand for reserves is a function of the flow of payments through the clearing system. When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock. Theory of Free Banking, first book. Why is there a Fed at all? Are we going to keep the Fed? Only if we want to keep the dollar rather than transition to a gold standard. Fed's role could be nothing more than a maintenance institution, no discretionary power. Strip it of open market operations and discount window; all done by private sector. Get rid of FDIC; could privatize the Fed clearing system. Get rid of the reserve requirements so reserve ratio can be flexible. Banks can also go bankrupt. How will whole system behave? In principle, total money supply adjusts: if people spend less of a bank's liabilities, the bank can afford to offer more. Stream of reserves. Precautionary balances: bank can inject more into the stream because the money isn't going to translate into more reserve losses. If people write checks every week and suddenly stop, bank can expand forever, because no one is going to draw on it.
Selgin on Free Banking | EconTalk | Library of Economics and Liberty