In Defense of Fiduciary Media – A Comment, or, What’s Wrong with 'Clown' or Play Money?
Quarterly Journal of Austrian Economics, Vol. 8, No. 2, pp. 55-69, Summer 2005
15 Pages Posted: 8 Jul 2011
Date Written: 2005
In an article published in the Review of Austrian Economics, George Selgin and Lawrence H. White (1996) defend their position that people should be free “to issue and use fiduciary media of exchange” against criticisms also published in the RAE by Hans-Herman Hoppe (1994), Jesús Huerta de Soto (1995), and Jörg Guido Hülsmann (1996). Selgin and White write off in short order, and rightly so, monetary systems consisting of fractional-reserve banking systems based either on governmental fiat money or, à la Hayek (1978), on fiat-type (i.e., irredeemable, non-commodity) monies. They distinguish fiduciary media bank notes and demand deposits redeemable for a commodity money (gold specie), on the one hand when they are backed less than 100 percent by reserves of gold specie, and on the other hand when they are backed by the full 100 percent. Thereafter Selgin and White commence their defense of monetary systems with fractional-reserve banking, provided they are based on gold specie money. They argue that such systems are both ethically and economically defensible.
Regarding ethicality, against the charge of fraud, they argue that, provided that the bank does not deceive depositors as to the matter of reserves, voluntary deposit contracts involving fractional-reserve deposits are not fraudulent. The only real point of contention in the literature favoring this system appears to be whether or not depositors know full well that banks engage in fractional reserve banking and thus whether or not banks have a duty to notify them and their assignees, and, if they do have such a duty, the particulars thereof. There is, of course, nothing exceptional about this.
With respect to the economics of the matter, they address several issues. We consider them in the following order: instability; resource costs savings; feasibility; and, mismatching of maturities. We conclude with a discussion of the possible conflation of time and demand deposits.
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