FRB and Fraud II: Electric Boogaloo

Economics Economics Questions
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FRB and Fraud II: Electric Boogaloo

Introduction

Fraud: a breach of contract involving deception for purposes of gain.

The crucial first step in any analysis of FRB and fraud must be to define the contract. If FRB is fraud, then it must be because a certain contract is deceptively breached for purposes of gain.

Note that if all parties to a contract are informed, then by definition there is no deception and hence no fraud. Of course, it is possible to breach a contract without involving fraud. Also, some contracts are inherently illegitimate, e.g. murder contracts, a contract to sell a square circle, etc.

Warehouse and loan contracts

The anti-FRB side makes a categorical distinction between warehouse banking and loan banking. As Hulsmann (2003) puts it: “A business either engages in money warehousing and sells money titles or engages in credit banking and sells IOUs.”

A warehouse contract is viewed as a demandable bailment. The depositor retains full ownership over their deposit, and can withdraw it on demand. The bank merely safekeeps the deposit, and has no right to use it. If the bank lends out the deposit or maintains anything less than 100% reserves, it is committing fraud.

As Salin puts it: “The depositor has a claim precisely on the physical unit of gold it has put in the bank and on which he may have printed a specific brand. In that case, it means he remains the owner of this piece of gold and the bank is only a warehouse. It would be a breach of contract if ever the bank was selling (or, even, lending) it to B.”

In a loan contract, the customer transfers ownership of the money to the bank for a specified period of time, and in exchange receives a claim redeemable at the end of the period. The bank now has full title to the money, and can use it as it wishes.

As Walter Block has pointed out in his article “Time Deposits, Dimensions, and Fraud”, it is possible for a loan contract to create contradictory ownership claims when an intermediary borrows short and lends long. For example, A lends gold to the bank for one year, and the bank in turn lends this gold to B for two years. It appears that the bank cannot fulfill it’s obligation to redeem A’s claim after one year. I will return to this problem below.

A third way?

The anti-FRB side, when discussing FRB, argue that because both banknotes and warehouse receipts are redeemable on demand, therefore FRB must be based on a warehouse contract. Hence, because a FR bank lends out its customers’ deposits and does not maintain 100% reserves, it is inherently fraudulent.

But is it really true that FRB is based on a warehouse contract? Is it really true that “A business either engages in money warehousing and sells money titles or engages in credit banking and sells IOUs”?

Consider the following contract: a fungible, demandable loan. The depositor transfers ownership of the gold to the bank, and in exchange receives a redeemable banknote (= loan). This banknote is redeemable on demand (= demandable). Lastly, the depositor’s claim is only to an equivalent sum of money, and not to the specific coins he deposited (= fungible).

Salin describes the contract thusly: “When A “deposits” one unit of gold in the bank, he is no more the owner of one unit of gold, but the owner of a piece of paper (a note) which, according to the bank promise, is redeemable at any time against one unit of gold. In other words, the bank becomes the legitimate owner of gold: There has been an exchange of one unit of gold against one unit of notes. Being the legitimate owner of gold “deposited” in its vaults, the bank can legitimately sell it or lend it.”

A valid contract

This contract is neither fraudulent nor illegitimate; to the contrary, it is perfectly valid. First, because all contracting parties are informed, there is no fraud. Second, the bank owns the gold and the depositor owns a banknote; because the depositor does not have a claim to the specific gold coins he deposited, but only to X ounces of unspecified gold coins, the bank can redeem its obligations with any equivalent quantity of gold coins. Accordingly, all rights can be exercised simultaneously and hence there are no conflicting rights.

For the same reasons, the fact that the bank has “more titles than money” doesn’t matter: the banknotes do not refer to gold originally deposited in the bank. The bank does not need to keep the specific coins deposited to redeem the customer’s claim. It can use any gold to redeem it’s obligations, not just the gold deposited by customers. Moreover, there is no need for the bank to hold 100% reserves. Because banknotes circulate as money substitutes, few customers would redeem them. The contract only says that the bank must redeem claims that are actually presented; it does not say how the bank must manage its business. Hence it is feasible to operate on a fractional-reserve basis. Of course, there is a risk that the bank might fail to redeem its obligations and breach the contract, but a non-zero probability of breach does not render a contract null and void.

Let’s see this contract in action: A deposits 100 ounces of gold in exchange for a 100 ounce banknote. The bank is now the owner of A’s gold, and A is the owner of a banknote redeemable on demand for 100 ounces of unspecified gold. Next, the bank lends 90 ounces to B for one year. At this point, the property titles are divided as such: The bank owns 10 ounces, is obligated to redeem 100 ounces on demand to A, and has a right to 90 ounces of gold after one year from B; A owns a banknote redeemable for 100 ounces; B owns 90 ounces and is obligated to pay the bank 90 ounces in one year. Note that because this is a fungible contract, all quantities of gold refer to quantities of unspecified gold. In this scenario, there is no fraud because all parties are informed, and the contract is valid because all rights can be exercised simultaneously.

One might object that if A presented his claim to 100 ounces immediately, the bank, only holding 10 ounces on reserve, would not be able to redeem it. True enough. But this isn’t fraud; it is merely a breach of contract. Moreover, who’s to say A will present his claim immediately? Why wouldn’t A present his claim after one year, when the bank does have 100 ounces on reserve? Even further, why do we have to treat the bank as a closed system? Bankers are rich; why can’t the banker pay the claim out of his own pocket?

Gaining ground

Even Hulsmann (2000) acknowledges that this contract is legitimate: “The best case for fractional reserve banking invokes freedom of choice and contract. Should fractional reserve banking be outlawed if all parties concerned know what they are doing? No, it should not be, because no law should suppress any foolish activity just because it is foolish.”

Hulsmann believes the following contract to be valid:

When you invest your gold in our FR Bank, you give up your ownership for an indefinite period of time. We become the owners of the gold and may use it as we wish. In exchange, we give you “FR notes” to the full amount of your deposit, we pay you x percent interest on the investment, and we will try our best to redeem your investment in gold on demand. If we cannot redeem it, the following rules apply. . . .

But there is no need to say “promise to try.” The bank can legally bind itself to redeem its obligations on demand; it is entirely possible for a bank to meet its obligations without 100% liquidity. Thus, the banknote would simply read “Payable to bearer on demand.” Also, the rules for nonredemption are not necessary for the contract to be legitimate; if the bank failed to redeem its obligations, then the customer could simply sue the bank for a breach of contract. That being said, banks might be more efficient if they do use such rules, e.g. option clauses to prevent bank runs.

Borrowing short and lending long

Earlier I mentioned the possibility of a loan contract with contradictory claims of ownership, namely, where an intermediary borrows short and lends long. Here’s the scenario: A lends gold to the bank for one year. The bank then lends the gold to B for two years. But if B owns the gold for two years, how can the bank fufill its obligation to pay A after one year? This problem hinges on whether the loan contract has a bailment or a fungibility clause.

If the loan contract has a bailment clause, then the bank must return to A the specific physical coins he deposited. But if the bank lends these coins out to B for longer than A’s loan to the bank, then clearly it cannot fulfill its obligations. This is fraud.

But if the loan contract has a fungibility clause, then the bank can redeem its obligations by using any equivalent quantity of unspecified gold coins. So if the bank lends to B the coins originally deposited by A, it can still fulfill its obligations to A by paying him with different coins. This is legitimate.

Conclusion

If my arguments are correct, I have shown that FRB under a fungible, demandable loan (FDL) contract is legitimate. This contract is not fraudulent because all parties are informed. The contract is also not illegitimate. Because it is a loan, the depositor transfers ownership of the gold to the bank in exchange for a redeemable banknote; because it is fungible, the depositor only has a claim to an equivalent sum of gold coins, and so the bank can redeem its obligations with any equivalent sum of gold coins. Therefore, all rights can be exercised simultaneously, and the contract is valid.

Thus, Hulsmann’s statement that “A business either engages in money warehousing and sells money titles or engages in credit banking and sells IOUs. No third possibility exists” appears to be a false dichotomy. On one hand, the FDL contract is similar to a warehouse contract in that it is redeemable on demand, but differs in that it is a fungible loan. On the other hand, the FDL contract is similar to a loan contract in that the depositor and the bank exchange property titles, but differs in that it is redeemable on demand. This case of a demandable loan does seem to be a third possibility. Perhaps we can preserve the dichotomy by classifying the demandable loan as a loan contract, but that is for another time.

One final note: Austrians and libertarians, when discussing government interventions, usually present their position as arguments against government monopoly and for the free market. For example, Walter Block argues for free market roads and against the government monopoly over roads. He does not argue for or against a specific type of road management. But in regards to money and banking, some libertarians argue against a specific type of bank management (FRB) and support another (warehouse banking), and some argue for a specific money commodity (gold). But, as libertarians, shouldn’t we only be opposed to government monopoly, and shouldn’t we only support the free market, instead of supporting or opposing a specific commodity or management practice? Isn’t this just imposing our own preferences?

In terms of rhetoric alone, it seems to me that talking about “free market banking” or “free market money” is much more radical than supporting “warehouse banking” or “the gold standard.” When we talk about the free market, we get at the root of the problem — government — and can explain why the market creates the best results. If we just talk about the gold standard vs. fiat money, it doesn’t immediately follow that it must be a free market gold standard; your audience might assume you’re talking about a government gold standard. Think about it: wouldn’t Ron Paul be much more radical if, instead of arguing for the gold standard, he supported free market money?

P.S. Please don’t bring up utilitarian arguments about the efficiency of FRB vs. warehouse banking. I’m concerned here only with its legitimacy.

For sources, see the bibliography.

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I suppose you could argue against a specific management practice (e.g. FRB) or support a specific commodity (e.g. gold) on thick libertarian grounds, but I have no idea what that argument would look like.

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Good post, I would support a free market in banking (and money). So long as the risk of FRB is carried by the participants, I could completely ignore the FRB notes and the inevitable runs.

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This isn’t a particularly major objection, but as I believe it may come up later on I’ll raise it now. The depositor retains full availability of the amount deposited, not ownership of the very same coins (or whatever else may be used as currency) that he deposited.

And in light of the above, this:

Is false. Whilst the bank certainly does provide their services as a warehouse, it is not necessarily true that the depositor retains his property rights in the specific monetary units that he has entrusted the bank with. In fact, as Huerta de Soto notes, what has traditionally occured is that for reasons of costs and other services the monetary units have been combined and the depositor merely retains availability of the quantity of a the goods in question. Of importance is the fact that immediate availability is always in favour of the depositor.

This is not an FRB contract though, the fact that the contract stipulates that the banknote is redeemable on demand implies that future goods are not being traded for present goods. So the contract is not a loan, it is a warehousing contract. I suppose the distinction you draw between your earlier example and this is that the depositor has property rights in the same goods in the former and only in the same number and quality of goods in the latter. But this is not the distinction between 100% reserve banking and FRB, this is the difference between a deposit contract and an irregular deposit contract, as Huerta de Soto elaborates in his treatise.

I’m not sure if this is strictly true, so I’ll make a small point and proceed, in any case. My argument stands whether or not this point of yours is true or false. My objection to this is simply that I believe the piece of paper is merely an explicit statement of the contract in question, a contract independant of its being written down on a piece of paper. In practise, this may not be so, of course. However, theoretically, it makes sense to believe that the contract and the paper are independant, the paper is only documentation that the contract has taken place between two parties.

Ignoring my previous objection, I think this is where your argument begins to fall apart. One, you’re still working under illusion that as long as the depositors are only entitled to the amount in question and not the specific goods in question it is not a demand deposit.

Two, your argument states that since the banker needn’t redeem specific coins the banker is not guilty of misappropration if he were to stack debt on the reserves. However, I fail to see how the distinction matters, either way he violates the contract. Be it through not having certain coins available or merely not having a certain amount available. The fact that he does not have the amount available is still fraud, since the good that the depositor is entitled to, is a present one. And as such, it is impossible for the banker to supply as such present goods, despite his claims to the contrary. Your argument hinges upon definition of the word available, that in the end fails once it is understand that the irregular deposit contract entitles the holder to present goods and not future goods.

Three, it is irrelevant whether or not the bank is likely to fail. Not only do fractional reserves set the business cycle in motion thus causing the very process likely to make them insolvent, but the bank is technically bankrupt the moment is begins operation on less than 100% reserves. It has more outstanding liabilities than it does assets.

But in this case what the individual is holding is not money or any sort of deposit contract. It is an aleatory contract, or a lottery, it is therefore fraudelant that the bank should claim it to be a a banknote. If the individuals make a contract that entitles them to a (present) good, that it is not certain the other party can provide and can only do so depending on (a) certain event(s) that is not a deposit contract but a lottery, as Block, Hoppe, Hulsmann and Huerta de Soto have all pointed out.

To reiterate, that is not a loan, it is still a deposit contract since the depositor still has access to a present good, which is the distinguishing characteristic of a demand deposit.

Well, that’s a false analogy. Libertarians oppose the state because it circumvents the price system, therefore it is logically for libertarians to oppose any institution that also circumvents the price system. If the anti - FRB group are correct, fractional reserve banking does exactly this, it depresses the interest rate and has a discoordinating effect on the economy, an effect that is extremely pernicious, the business cycle.

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OK, so you’re saying the warehouse contract can either have a bailment clause (claim to the specific coins) or a fungibility clause (claim to an equivalent sum of coins). Is this the same distinction as between a deposit contract and an irregular deposit contract?

You mean historically? I’m not trying to make a historical argument; I’m just showing that this FDL contract is logically possible (and valid).

It doesn’t really matter what we label the contract, so long we understand what the contract means, i.e. the terms of the contract. As I see it, there are three important terms: 1 - The depositor transfers ownership of the gold to the bank, and in exchange receives a redeemable claim; 2 - This claim is redeemable on demand; 3 -The depositor’s claim is only to an equivalent sum of money, and not to the specific coins he deposited.

I agree that it’s not a loan contract, because it is not an exchange of present goods for future goods. But I don’t think it’s a warehouse contract either, because the depositor transfers ownership of his gold to the bank. This contract is neither a strict loan nor a strict warehouse contract; it’s something else.

I don’t understand what you’re trying to say here, but I don’t think it affects anything anyhow.

As I said above, I don’t think it’s a demand deposit/warehose contract because the depositor transfers ownership of their gold to the bank.

Again, it’s not just the fungibility clause, but also the fact that the depositor transfers ownership of their gold to the bank that is important. As the bank is now the owner of the gold, it can put it to use, e.g. loan it out.

Do mean the bank’s actions are fraud, i.e. the customer is deceived, or that they constitute a breach of contract? Because under the contract I’m talking about, the customers are informed that the bank is loaning out their money, so it can’t be fraud.

Moreover, under this contract, the bank doesn’t agree to hold 100% reserves. It only agrees to redeem on demand claims that are actually presented. Because few customers would in fact redeem their claims (which circulate as money substitutes), the bank need only keep enough reserves to meet the actual withdrawals. As Larry White puts it:

“In a very practical sense, moreover, the funds will be available to [the customer] whenever he seeks a cash withdrawal or writes a check to transfer funds outside the bank. Though the bank admittedly could not satisfy all customers simultaneously should they all try to withdraw at once, the risk of that event (experience tells us) is small (though not zero) for customers of a prudent bank. Absent a run, the bank can satisfy all redemption demands that its customers actually do make.”

Where withdrawals ≤ reserves, the bank can meet its obligations indefinitely.

I think it is relevant, in that even if the bank is likely to fail, that doesn’t void the contract. For example, if the business cycle makes FR banks likely to fail, their contracts are still legally binding. I can’t comment on the business cycle stuff; I haven’t been focusing on the utilitarian arguments. Have you read this paper by Salin? I think he argues that both the pro- and anti-FRB sides are wrong regarding the utilitarian arguments. Last, even if the bank is “technically bankrupt,” why does that matter?

Well, I’ve alread argued that the contract I’m talking about is not a deposit/warehouse contract. I suppose it could be like a lottery ticket, but one that you have a 99% chance of winning.

Right. My point only follows if my arguments for FRB are correct.

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im not sure about this ‘claim’ business.

your position seems to be that, the note that depositors recieve would say on it ‘redeemable for the sum of ‘20 gold coins’ if in stock’ simply puts the obligation on the bank that as and when the original depositor , the note carrier, comes to redeem the note, the bank will check their gold coin inventory, and are obliged to hand over in exchange for the note, the first 20 gold coins they come across. such a ‘claim’ means that if the bank should happen to not have enough gold coins in the inventory, the note redeemer will be dissapointed, to have less than 20 or perhaps even 0 coins for his note, but this was explicit to him when first having received the note.

such an arrangement seems compatable with contract law, however it seems rather an unattractive banking paradigm from the perspective of would be depositors.I would be happy to see an explicit GamleBank that issues GambleNotes but Im not even sure that this ‘banking paradigm’ would even be competeing in the same industry as whatever Bailment Banks since gambling and wharehousing are quite different activities.

any gamblebank could operate profoundly conservatively and get good credit history, and track record for fully redeeming and as the money on deposit swelled the incentive to spend all the gold on diamonds and then decline to redeem any notes for gold (as the bank has no gold) would increase.

for a 100% money wharehouse or Bailment Bank, if they were to sell off all the gold for diamonds, they would still owe their depositors gold and could be pursued for this.

what currency would you prefer to hold?

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“In a very practical sense, moreover, the funds will be available to [the customer] whenever he seeks a cash withdrawal or writes a check to transfer funds outside the bank. Though the bank admittedly could not satisfy all customers simultaneously should they all try to withdraw at once, the risk of that event (experience tells us) is small (though not zero) for customers of a prudent bank. Absent a run, the bank can satisfy all redemption demands that its customers actually do make.”

You can’t ignore utilitarian arguments when making these kinds of arguments. Here’s why: Anti-FRB theorists make the argument that the expansion of the money supply through FRB sets the business cycle in motion (by lowering interest rates below what they would be in a 100% reserve based system - the lowering of the interest rates is undeniably true, whether it is what sets the business cycle in motion is a question of theory), which by definition (if you believe the theory) means that there will be a cluster of business errors and hence loan defaults.

If that is the case the very process of FRB sets in motion a series of events which ends in loan defaults, and then an inevitable bank run as bank customers learn of the defaults and rush to the bank to redeem their deposits.

It’s similar in a way to the argument in the Black Swan, which holds that because all of the faulty models of mainstream economists and decision makers lack the possibility of a black swan, they encourage actions which are much more likely to bring the black swan about (for instance, the models with the assumption that housing prices wouldn’t fall increased housing loans to the point that housing prices had to fall)

If FRB does cause the business cycle, then it also causes bank runs, which means that the very practice of FRB must result in the inability of banks to redeem their deposits.

So you cannot ignore ABCT when arguing for or against FRB. You cannot ignore the utilitarian argument to determine whether or not it is fraud, if you are intellectually honest about the matter.

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No, no. The banknote/claim would read “Payable to bearer on demand.” The bank is not “promising to try” to redeem their claims, as Hulsmann puts it; they are creating a binding legal obligation to pay the bearer of a claim that is presented for redemption. If the bank failed to redeem any claims, the customer could sue for breach of contract.

It seems I’ve made a strong case that FRB under this FDL contract is legitimate. I guess the next step is to address the feasibility and (gasp!) desirability of FRB.

A generally accepted medium of exchange resulting from free market competition.

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If we accept your second statement as true, I don’t see why the first one is true. If FRB does cause the business cycle, then all that means is that FRB is a very risky business. Caveat emptor. Just because the bank might breach some, or even most, of its contracts does not invalidate the contract made between the bank and its customers. As Hulsmann (2000) put it: “Should fractional reserve banking be outlawed if all parties concerned know what they are doing? No, it should not be, because no law should suppress any foolish activity just because it is foolish.”

If we banned all business practices that might involve a breach of contract, we would effectively ban all commerce.

That being said, I think we should discuss the empirical arguments, while recognizing that they do not affect the legitimacy of FRB.

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BTW, if anyone wants to read more about the pro-FRB side to get a better understanding or to sharpen their own arguments, I recommend the following:

Short articles:

De Soto Attempts to Justify Fractional-Reserve Banking - White (oddly worded title…)

Huerta de Soto’s Case Against Fractional Reserves - White

Should We Let Banks Create Money? - Selgin

Longer articles:

Accounting for Fractional-Reserve Banknotes and Deposits—or, What’s Twenty Quid to the Bloody Midland Bank? - White

In Defense of Fractional Monetary Reserves - Salin

In Defense of Fiduciary Media—or, We are Not Devo(lutionists), We are Misesians! - Selgin, White

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these posts were way too long for me to read, but i just had to say im a fan of the title

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so despite promising to all depositors that they will be paid on demand they have no obligation to take steps to make this possible, i.e. keep 100% reserves?

lets assume that $ are gold dollars for the ease of understanding what is owed. over these silver deposits

if I pay you 100$ to take silver that belonged to me, and after some time, to release a same quantity of silver back to me ‘on demand’, and you take steps to make this possible and decline other engagements, and you accept the contract.

then if you care for my silver , and arrange your affairs so that If I came along any time day and night the gold would be there to give back to me, the money is rightfully yours, if you do not, it is not, and you are a theif of the 100$ and owe it to me and if uou fail, there are many cases where you owe4 the silver as well.

if we start over but this time you know before you accept my deal that you are going to loan out silver for periods of time so as to charge rent-a-silver rates on it, and so it wont be possible for me to receive my silver on demand, even before being put to the test and finding that you had gotten silver back to me when i asked, or had failed to do this, by your own admission your intention is to not fulfill what your contract demands, as such you defraud me of my 100$ at the point of accepting the contract and first taking the 100$.

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You are imposing a burden on banks that no other business has. If you and I make a contract you have every right to ask before you sign the contract how I am going to fulfill the contract. After you sign the contract, how I fulfill the contract is my business. In order to show that FRB is inherently fraud then you have to show in all cases the contract will be breached not just that under certain circumstances that you wish to apply.

Banks may use all kinds of tools to deal with the possibility of not having adequate reserves at any given moment to include insurance, access to gold for leasing in case of emergency, delay clauses on their bank notes that can they use to sell assets, or capital reserves held in other assets besides gold, ie silver.

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if there are multiple ways of delivering gold on demand, then you are right. if there is just one, keeping the gold always at the ready , then you are wrong.

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Sage, I’ll try to answer you as soon as possible, I’ve been a bit busy for the past few days though (ISLM models are such fun, you see).

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Well, the contract only says the bank must redeem claims on demand. It doesn’t say how the bank must be managed. Banks with dumb managers who failed to redeem claims on demand would be sued and go out of business. Banks with judicious managers would earn profits and expand. You know, competition.

The way I see it, the bank doesn’t need to maintain 100% reserves: because banknotes circulate as money substitutes, few customers would actually redeem them. In other words, if only a fraction of banknotes will be redeemed, then the bank only needs to hold a fraction of its deposits as reserves.

As Mises writes in The Theory of Money and Credit::

A person who takes upon himself the obligation to deliver on demand a particular individual good, or a particular quantity of fungible goods (with the exception of money), must reckon with the fact that he will be held to its fulfillment, and probably in a very short time. Therefore he dare not promise more than he can be constantly ready to perform. A person who has a thousand loaves of bread at his immediate disposal will not dare to issue more than a thousand tickets each of which gives its holder the right to demand at any time the delivery of a loaf of bread. It is otherwise with money. Since nobody wants money except in order to get rid of it again, since it never finds a consumer except on ceasing to be a common medium of exchange, it is quite possible for claims to be employed in its stead, embodying a right to the receipt on demand of a certain sum of money and unimpugnable both as to their convertibility in general and as to whether they really would be converted on the demand of the holder; and it is quite possible for these claims to pass from hand to hand without any attempt being made to enforce the right that they embody. The obligee can expect that these claims will remain in circulation for so long as their holders do not lose confidence in their prompt convertibility or transfer them to persons who have not this confidence. He is therefore in a position to undertake greater obligations than he would ever be able to fulfill; it is enough if he takes sufficient precautions to ensure his ability to satisfy promptly that proportion of the claims that is actually enforced against him.

You can’t issue more bread claims than there are loaves of bread because people want to eat the bread. But with money, people don’t want the gold; they want a commonly accepted medium of exchange. In other words, you can’t eat a bread claim, but you can “eat” a money claim — you can use the banknotes without actually redeeming them. Hence, people would use banknotes as money, and would rarely have the need to redeem them. Accordingly, banks could maintain fractional reserves.

So even if there is only one way of delivering the gold (keeping it on reserve), it doesn’t make a difference, because the bank can still redeem all of its obligations indefinitely.

But as Maxliberty pointed out, there are other ways, e.g. insurance, loans, option clauses, capital, or even out of the banker’s pocket (bankers are rich, remember?).

17

That is the whole point, there are multiple ways of acquiring gold to meet redemptions so the artificial constraint of only one way is fundamentally flawed.

18

Yes, that is the fundamental difference I see between the irregular deposit contract and the regular deposit contract, I’m mainly drawing on Huerta de Soto here (and to some extent Salerno). As for the question as to whether that is a historical claim, no, it was never meant to be, in fact it was a somewhat premature comment that perhaps I would have removed upon reading the rest of your post, so pay no attention to that comment.

You, on numerous occasions, object to my point that the FDL is merely a warehousing contract, presumably on the grounds that the depositor does not get the same goods in return, yet, I would argue that according to subjectivism the depositor does indeed get the same goods in return, and this is demonstrated in the making of the contract. Let me put it another way, do people put there rare coins into the bank or into their safe at home? Moreover, if you are disputing the fact that it is a warehousing contract I believe the burden is on you to inform us exactly what sort of a contract it is, and in such a way that obviates the charge of fraud wrt FRB. On this point my final objection is that if the bank is the owner of the gold on what grounds can you object to the bank manager going away and buying a car with the money, provided that he can “possibly” meet all of his obligations this is perfectly legitimate business from the point of the defender of FRB.

Given the FDL/ irregular deposit contract, I still think it would be fraudulent for the bank to say it is giving out banknotes. Rather, the claims to money that the bank are giving out are conditional on certain events (a bank ran) not occuring, it is essentially a lottery ticket, since the bank has more claims to present goods than it has present goods. If it were to advertise its notes as lottery tickets (or aleatory contracts) as opposed to demands to present goods then I think the charge of fraud could be avoided, otherwise, no. I think this debate hinges on the fact that the money in the bank is a present good, not a future good (as it would be in a loan contract). This negates White’s point in my opinion, since the rights that are given to the depositor are to withdraw their money at any time, these are infringed (and cannot be true for all depositors) when the bank engages in fractional reserve banking. Think of it this way, the “service” provided is not just having the money in a warehouse but is having the money immediately available, in a warehouse.

Sage: I apologize for the lateness of my response (and perhaps the poor timing whilst you’re bogged down in other deabtes). I’ll read the Salin paper once I get the chance, preliminary thoughts are that whilst utilitarian arguments may not be entirely valid, I don’t think one can completely ignore the pernicious effects of FRB (namely, the business cycle). As Huerta de Soto notes, contracts that cause large amounts of damage to third papers may be deemed void, I think that custom would evolve in a way to reflect this, in that, banks that practise FRB will be punished by local courts (and citizens) regardless of the actual legitimacy of the practise. I’m stuck between my current position and Kinsella’s, in that I’m not entirely convinced by the Huerta De Soto - Hoppe - Rothbard - Huelsmann - Block position, but I think it’s largely irrelevant because banks will go out of business that practise FRB regardless of its legal validity. I’m not entirely at this position yet, there’s a few implications that I don’t like (and I think Kinsella merely rejects this due to a particular meaning of the word fraud) such as the fact that the banker can literally walk off and go spend the money on whatever he wishes.

19

what Giles said ^^^,

bring on the Gamblebanks!

20

FRB is still theft! FRB under the conditions that you have assumed may not be fraud, but what about theft? If I save $100, I free up $100 worth of resources to be shifted from consumption to investment in higher orders of production. A voluntary shift of resources from consumption to investment has taken place. When a bank loans out $1000 on the basis of just the $100, it has shifted $1000 from consumption to investment, of which $900 have been diverted to investment by involuntary means, at least temporarily until inflation catches up and we have a bust. So how exactly is this not theft? The structure of production is being changed, not by voluntary means of individuals who have decided to forgo consumption and save, but by the FRB bank. No contract between the depositor of the $100 and the bank can change the fact that $900 worth of resources has been stolen from consumption to investment, so that a bank and the depositer can earn interest on that $900. No contract will also change the fact that the value of money is being debased by this process. FRB is theft! And the argument that it is theft only by a coercive monopoly but not in a free market is quite inconsistent with libertarian philosophy. It is true that FRB under free banking will be kept to a minimum by the natural limitations of the free market. But a free market will reduce any fraudulant, dishonest, and crony businesses by the mere fact that reputation for honesty is an important financial asset. Should then all types of theft in business be legal, as long as we have a free market?