Larry White Interview at the Daily Bell

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Daily Bell: What is free banking and why has it been controversial with Austrians?

Lawrence White: A free banking system means a monetary system where private, competitive, unregulated banks are responsible for providing all kinds of payment instruments and intermediation. So generically it means the absence of restrictions on banking and – in other words laissez-faire banking. An implication is banks and not the government will provide currency as well as transferrable deposits. It implies the absence of the central bank and central banks are everywhere in the world today. That’s the big difference from the status quo. F.A. Hayek was somewhat ambivalent — and I wrote a paper about that – about free banking, out of the concern that banks might be inherently unstable pro-cyclically.

Some people questions deny that free banking would or should be allowed to function with fractional reserve accounts. Murray Rothbard was the leader of the point of view that fractional reserve banking ought to be outlawed. He thought the fractional-reserve bank was inherently defrauding the customer. Some of his followers have switched to some other kinds of objections. I don’t hear the fraud argument as often these days, but I do hear the argument that there is something absurd about a fractional reserve generally because it implies that two people are exclusive owners of the same coin; which is I think is the misunderstanding of the arrangement between the bank and its customer. Another objection is that it reduces the value of gold held by third parties, but there are all kinds of changes in the value of your property that come about through market forces, and we can’t outlaw those consistent with properties property rights.

Daily Bell: Do you consider yourself an Austrian Economist?

Lawrence White: Yes. If Austrian means heavily influenced by Ludwig von Mises and Hayek, then certainly yes. And on my CV, you will see that I was part of the Austrian Economics program at NY University and I am now part of the Austrian economics program at George Mason. I was on the committee that wrote and evaluated the Austrian economics field exams. So I don’t think I can deny being an Austrian.

Daily Bell: Is free-banking the freest kind of money association available?

Lawrence White: Well that’s how I think of it. It’s a system based on a free contract without third- party legal interference between banks and customers. Various kinds of contracts are available. The ones we observe historically are the ones that we presume would prevail if free banking were re-established today. So it’s usually described as being based a gold or silver standard, which we saw historically before governments began to interfere.

Daily Bell: The idea is to let the market decide on the amount of reserves?

Lawrence White: Yes, in the sense that there would be competition among banks. Banks have a trade- off to consider between earning more interest and holding more reserves. Holding more reserves makes the bank safer. Being safer may be important for attracting customers. Not all banks may follow the same policy but people will sort themselves among banks according to how safe they think the banks are versus how big a return the bank pays. Most people want a very safe bank, so there is a market force that compels banks to act prudently. Remember deposits would not be guaranteed in a free banking system, so banks have to convince potential customers that they are trustworthy…

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