Toby Baxendale and the folks at the Cobden Centre have been working on various banking proposals that would demand that banking enterprises operate under the ordinary rules of property, contract and commerce. Banks, in other words, would have no special privileges provide by law or politics.
The proposal is for a free market in money and banking. Baxendale envisions that there are basically 3 functions of banking and finance. In the proposal each of these functions would be accomplished by separate "windows" or "divisions" of the banking enterprise (or by separate enterprises).
The first function is the most basic of banking functions which is to serve as a warehouse. The warehouse would function just as a safety deposit box functions. The second function would be the saving and loan function. Financial intermediation would be accomplished through this second "window". Credit would be based on savings, never created out of thin air. The third function would be more the "investment" or "high risk/high yield" finance option. Here consumer/investors would provide funds to money managers who would attempt to invest the funds to realize high returns.
I don't know if I have completely captured the proposal in its full (@Tony Evans straighten me out if I am wrong). But if I have captured the Baxendale proposal, I wonder how anyone can object to it on either side of the squabble between 100% reserve vs. fractional reserve banking. As I am reading it, the core idea that banking should practice without an special privilege under the ordinary principles of property, contract, and commerce is something all market=oriented economists can agree to. Also, the financial intermediation role of banking is served in the second window of basic savings and loans. And finally, the more adventuresome investment function is served by the third window. And in the proposal, each of the separate functions are sealed off from one another so that the risks from the 3rd window (under contract with consumers) will not spill over to the other functions if decisions prove to be incorrect.
I realize that my presentation is stripped down and simple. But remember I am the champion of the position that simple economics is not simplistic, and that in times such as what we are living through we need ordinary economics more than ever. But I also realize that scholars such as Steve Horwitz, Larry White and George Selgin have forgotten more monetary economics and monetary history than I will ever learn, so 9 out of 10 times defer to their judgement.
My position on the squabble within Austrian economics has more or less been that I rejected the moral objection raised against fractional reserve banking on two grounds: (1) I believe people know that the money they deposit in the bank is not the same physical units of money that they pick up when they withdraw from their account, and (2) I want to understand the economics of free banking. To me Selgin and White have explained the self-regulation of banks from overissuing in a competitive currency system. So to me the debate was not one of economic theory and instead reduced to one concerning a market prediction of what consumers would value from money and banking services in a truly free market economy. And I think the White argument about the law of reflux explained why banks operating under fractional reserve would be held in check.
Now I do also understand that there are theoretical questions concerning free banking and credit expansion. But I come down on the side of the monetary equilibrium/free banking theorists who emphasize the self-regulation through the market of money supply and money demand. Everyone needs to remember that both sides of this debate are challenging the existence of a centralized monopoly supplier of the currency in the economy, and instead are advocating the demonopolization of money and the destatization of money. Money and banking instead of privileged enterprises, would operate based on the common law principles of property, contract, and the general rules of commerce.
Baxendale's proposal begins there and develops consistently from that premise. Or at least that is how I read it, so why am I wrong? I am more than willing to be persuaded that I don't really know what I am talking about on this issue. So my question really intended to "think aloud" and get others who know more than I do to set me straight on where I am going wrong in my effort to pursue simple economics that is not simplistic.