WEBVTT

NOTE Easing the Limits on Bank Credit Expansion

1
00:00:00.000 --> 00:00:04.000
Easing the Limits on Bank Credit Expansion

2
00:00:04.000 --> 00:00:13.000
The institution of central banking eased the free market restrictions on fractional reserve banking in several ways.

3
00:00:13.000 --> 00:00:25.000
In the first place, by the mid-19th century, a tradition was craftily created that the central bank must always act as a lender of last resort

4
00:00:25.000 --> 00:00:29.000
to bail out the banks should the bulk of them get into trouble.

5
00:00:29.000 --> 00:00:35.800
The Central Bank had the might, the law, and the prestige of the state behind it. It was

6
00:00:35.800 --> 00:00:41.520
the depository of the state's accounts, and it had the implicit promise that the state

7
00:00:41.520 --> 00:00:48.360
regards the Central Bank as too big to fail. Even under the gold standard, the Central

8
00:00:48.360 --> 00:00:55.320
Bank note tended to be used, at least implicitly, as legal tender, and actual redemption in

9
00:00:55.320 --> 00:01:01.240
Banking gold, at least by domestic citizens, was increasingly discouraged, though not actually

10
00:01:01.240 --> 00:01:03.200
prohibited.

11
00:01:03.200 --> 00:01:08.080
Backed by the central bank and beyond it by the state itself then, public confidence in

12
00:01:08.080 --> 00:01:14.340
the banking system was artificially bolstered and runs on the banking system became far

13
00:01:14.340 --> 00:01:16.440
less likely.

14
00:01:16.440 --> 00:01:22.160
Even under the gold standard then, domestic demands for gold became increasingly rare

15
00:01:22.160 --> 00:01:26.040
and there was generally little for the banks to worry about.

16
00:01:26.040 --> 00:01:31.120
The major problem for the bankers was international demands for gold.

17
00:01:31.120 --> 00:01:37.160
For while the citizens of, say, France could be conned into not demanding gold for notes

18
00:01:37.160 --> 00:01:44.020
or deposits, it was difficult to dissuade British or German citizens holding bank deposits

19
00:01:44.020 --> 00:01:48.500
in francs from cashing them in for gold.

20
00:01:48.500 --> 00:01:54.240
The Peel Act system ensured that the central bank could act as a cartilaging device and

21
00:01:54.240 --> 00:02:00.580
in particular to make sure that the severe free market limits on the expansion of any

22
00:02:00.580 --> 00:02:03.740
one bank could be circumvented.

23
00:02:03.740 --> 00:02:10.320
In a free market, as we remember, if a Rothbard bank expanded notes or deposits by itself,

24
00:02:10.320 --> 00:02:16.220
these warehouse receipts would quickly fall into the hands of clients of other banks and

25
00:02:16.220 --> 00:02:23.220
These people or their banks would demand redemption of Rothbard warehouse receipts in gold.

26
00:02:23.220 --> 00:02:28.980
And since the whole point of fractional reserve banking is not to have sufficient money to

27
00:02:28.980 --> 00:02:33.580
redeem the receipts, the Rothbard bank would quickly go under.

28
00:02:33.580 --> 00:02:39.400
But if a central bank enjoys the monopoly of banknotes and the commercial bank's all-paramid

29
00:02:39.400 --> 00:02:45.500
expansion of their demand deposits on top of their reserves or checking accounts at

30
00:02:45.500 --> 00:02:52.020
at the Central Bank, then all the bank need do to assure successful cartelization is to

31
00:02:52.020 --> 00:02:57.860
expand proportionately throughout the country so that all competing banks increase their

32
00:02:57.860 --> 00:03:01.860
reserves and can expand together at the same rate.

33
00:03:01.860 --> 00:03:09.140
Then, if the Rothbard Bank, for example, prints warehouse receipts far beyond, say, triple

34
00:03:09.140 --> 00:03:21.140
It's reserves and deposits at the central bank. It will not on net lose reserves if all the competing banks are expanding their credit at the same rate.

35
00:03:21.140 --> 00:03:27.140
In this way, the central bank acts as an effective cartelizing agent.

36
00:03:27.140 --> 00:03:37.140
But while the central bank can mobilize all the banks within a country and make sure they all expand the money substitutes they create at the same rate,

37
00:03:37.140 --> 00:03:42.140
They once again have a problem with the banks of other countries.

38
00:03:42.140 --> 00:03:52.140
While the Central Bank of Ruritania can see to it that all the Ruritania banks are mobilized and expand their credit and the money supplied together,

39
00:03:52.140 --> 00:03:57.140
it has no power over the banks or the currencies of other countries.

40
00:03:57.140 --> 00:04:03.140
Its cartelizing potential extends only to the borders of its own country.