Although, as we have discussed before, Toby Baxendale is skeptical of fractional reserve free banking as might be defended by Selgin, White, and myself, he is seriously engaging both sides of the debate within Austrian Economics and is genuinely interested in finding some common ground. With that in mind, he has asked me to post the following proposal to see what sort of reaction it gets from our readers. I believe that it will also be posted on the Mises blog with the same purpose in mind.
I would be particularly interested to hear what George and Larry have to say. Toby's proposal follows.
“Come the Revolution, in a free banking world, where there is at least no lender of last resort, commodity backed money with no possibility of over issuing above that commodity in reserve and no deposit insurance, it would be possible for safe deposit accounts and savings accounts where money is lent to borrowers to exist. Both 100% Reserve Free Bankers and Fractional Reserve Free Bankers would be happy thus far. If an instant access demand deposit is offered that is fractional in nature, we get heated debate within the free banking community, the arguments will be familiar to readers of this site. So I am going to throw in a left field ball and see what comes out in debate about what I see as a potential solution to this. I will remain silent on the thread until all comments are in.
The Third Type of Account (not named yet, will not use 100% or Fractional in the title due to fear of the verbal abuse that will come forth!)
Consider this, a depositor goes into his bank, he is offered a safe deposit account that is safe, but gives no interest, his time preference is such that he wants to earn some interest. The bank worker shows him to his colleague who offers him a savings account. Our depositor loves the rate of interest offered, but notes that he has to put his money away for at least a month, 3,6,9 18 months X number of years to get a proceedingly better rate of interest. This does not satisfy our depositor as he wants to have instant access and interest. He wants to have his cake and eat it. He gets taken to see the Third Type of Account manager. This manager says this account is a timed deposit account in nature i.e. your money is locked away for at least a month, 3,6,9 18 months X number of years, but the bank will allow instant access , by exception for the liquidity that it keeps in reserve all the time. However, should there be too much call on liquidity, the bank reserves the right to point out that you the depositor are actually a de jure timed depositor / creditor to the bank for at least a month, 3,6,9 18 months X number of years and are going to he held to the time period you freely signed up to.
This third type of account always allows the bank to be reliant on no legal privilege and no accounting standard that is different to other commercial organisation to keep its current and long term creditors whole at all points in time as the creditor in question is in fact a timed depositor who has instant liquidity by exception and not by demand. The reality is this liquidity would be almost at all times there bar the period of bank runs. In fact dare I say it, I can feel the avalanche of invective building up already, that this is a robust 100% reserve type account form an accounting an legal point of view, with all the benefits of a fractional reserve account of instant access, with non of the inflationary business cycle inducing consequences hotly alleged by the 100% Reserve Bankers."