Short Changing 100 Percent Reserves (Report)
The Quarterly Journal of Austrian Economics 2010, Summer, 13, 2
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Publisher Description
George Selgin (2009) offers a challenge to 100 percent reserve money with the problem of small change. He observes that transaction costs will rise and economic activity will be reduced if there is a limited amount of small change. He considers token coins (1) to be the preferable solution among the many possible solutions. However, token coins are considered fiduciary media and therefore could represent a violation of the 100 percent reserves. Requiring 100 percent reserves for the token coins would make the issuing of tokens costly and unprofitable. Therefore the 100 percent reserve doctrine would limit small change, hamper exchange and leave economic opportunities foregone. This challenge, while new and creative, falters on several grounds. Here the focus will be on the free market economy where small change or token money is a medium of exchange that need not be backed by reserves even though it is deficient in its intrinsic value of metal relative to the medium of exchange. (2) However, on a more basic level Selgin's association of 100 percent reserve money and 100 percent reserve banking is incorrect. Advocates of 100 percent reserve banking call for 100 percent reserves in banking and for market-determined money, not 100 percent reserve money. The economic problems associated with fractional reserve banking are not related to market-based money, and neither is there an issue of fraud, other than the ordinary sort. Nonetheless, it is still worthwhile to provide a full response to challenge of small change.