FRB + fraud

[Sage]

As I understand it, the common argument that fractional reserve banking is fraud goes like this:

FR banks only hold a fraction of deposits in reserve, while simultaneously promising to redeem all deposits on demand. Thus, because a bank cannot redeem all of its obligations, FRB is inherently fraudulent.

But is this reasoning correct? It seems to me to have some errors. Consider the following:

1 - If you murder someone, you’re a criminal.
2 - Therefore, you’re a criminal.

This reasoning is obviously wrong; it’s missing the crucial middle term “You murdered someone.” But isn’t the fraud argument exactly the same?

1 - If all customers redeem their deposits, then the bank is bankrupt and fraudulent.
2 - Therefore, the bank is bankrupt and fraudulent.

Likewise, this argument is missing the crucial middle term “All customers redeemed their deposits.” Unless all customers do in fact attempt to redeem their deposits, then FRB is not fraud. Put differently, FRB is only fraud when the implicit theft has actually occured, but not before that.

Thus, we cannot say apriori that FRB is fraud; only aposteriori can we know if it is fraudulent or legitimate.

Rothbard, in WHGDtOM, writes that when a bank “issues any fake receipts, it is already committing fraud, since it immediately becomes impossible for the bank to keep its pledge and redeem all of its notes and deposits.” (57)

But this isn’t right. We cannot know apriori that all customers will in fact attempt to redeem all of their deposits. And unless they do, there is no implicit theft, and hence no fraud. Just as you’re not a criminal unless you actually murder someone, FRB isn’t fraud unless a customer is actually defrauded.

Thoughts?

[Bostwick]

@Sage

Unless all customers do in fact attempt to redeem their deposits, then FRB is not fraud.

Not true.

When the bank runs out of money is not when the fraud occurs, that’s just when the fraud is found out. If the fraud had not existed, it would not have run out of money. Mises used the trespass example, asking does the trespass occur when the trespasser enters the property or when he is discovered?

If you tell two different people that they own the same thing that is considered fraud in every transaction except one. No warehouser can do that, except a banker. Now is it just coincidence that the only industry “lucky” enough to get away is the only one with deposit runs?

If you want to argue that FRB is somehow not fraud, go ahead. Either way, it is suicide. The banking system as it is, could not survive without its government thugs. And as anyone can witness, its not very healthy even with them. You are nothing but a champion for the destruction of the banking industry.

[Conza]

@Sage

As I understand it, the common argument that fractional reserve banking is fraud goes like this:

FR banks only hold a fraction of deposits in reserve, while simultaneously promising to redeem all deposits on demand. Thus, because a bank cannot redeem all of its obligations, FRB is inherently fraudulent.

But is this reasoning correct? It seems to me to have some errors. Consider the following:

1 - If you murder someone, you’re a criminal.
2 - Therefore, you’re a criminal.

This reasoning is obviously wrong; it’s missing the crucial middle term “You murdered someone.” But isn’t the fraud argument exactly the same?

Thoughts?

Thoughts? Yeah, you erected a strawman. Or simply haven’t actually understood the positions you profess you do and proceeded to question it’s reasoning.

FRB is inherently INFLATIONary. Inflation is hidden taxation. Taxation is theft.

There is the “you murdered someone” part.

[DanielMuffinburg]

Say Depositor A deposits 1 ounce of gold in the Bank. Under fractional reserve banking, the bank would lend out 1 ounce of gold plus another ounce of gold. However, there is a problem here, in that the bank only has one ounce of gold to lend out but is attempting to lend out 2 ounces of gold. It’s impossible.

One way around this impossibility is to issue notes. Each note represents one ounce of gold. Now, the bank can lend out two (or as many as it wants) notes, thereby, issuing pieces of paper that represent two ounces of gold. However, the problem is that there is only one ounce of gold in deposit and pieces of paper with full claim to that one ounce. However, that is a contradiction in rights and rights can’t contradicteach other. Hence, one note represents one ounce of gold and the other note represents a non-existent ounce of gold. Thus, having a piece of paper that represents claim to something that does not exist is fraud.

[Sage]

@JonBostwick

Mises used the trespass example, asking does the trespass occur when the trespasser enters the property or when he is discovered?

Hmm. This is an interesting analogy, but I don’t think it works.

Take the example of a FR bank where its customers never redeem their deposits all at once, and throughout its history there are no bank runs. Through judicious management of their reserve ratio, all its customers redeem their deposits at their wishes. No one ever loses their property. Are you saying that this is fraudulent, even though nobody lost any property?

The analogy is inapt because while the trespasser immediately violates the property rights of the owner, it is still possible for a FR bank to redeem its deposits at the customers wishes (of course, it can’t redeem all of the deposits all at once; my point is that an FR bank can be legitimate if only some of its customers redeem their deposits at any one time).

@JonBostwick

You are nothing but a champion for the destruction of the banking industry.

Full disclosure: I was on the cover of Champions For the Destruction of the Banking Industry Magazine.

@Conza88

FRB is inherently INFLATIONary. Inflation is hidden taxation. Taxation is theft.

I don’t think this argument works. You can only have a right to the physical integrity of property, not the value of it — the value of money is determined by the subjective valuations of other people. Since inflation affects the value of money, it is not a rights violation. For more on inflation as theft, see here.

Moreover, under the scenario I’m talking about —free banking— there is no government forcing anyone to use a currency. Everyone freely chooses what money they use. Accordingly, inflation is not theft: volenti non fit injuria.

[Sage]

@Daniel

Now, the bank can lend out two (or as many as it wants) notes, thereby, issuing pieces of paper that represent two ounces of gold. However, the problem is that there is only one ounce of gold in deposit and pieces of paper with full claim to that one ounce. However, that is a contradiction in rights and rights can’t contradicteach other.

My whole argument is that there is no contradiction in rights until the customers actually attempt to redeem their deposits.

So, in your example, say the bank has one ounce of gold, and lends out two notes to A and B. A goes on vacation to French Polynesia and never comes back. B can redeem his deposit whenever he wants. There are no problems with conflicting claims, and life goes on. This is not fraud.

But if A and B both try to redeem their deposit, then they will have competing claims, and the bank will fail. This is fraud.

Thus, FRB is not necessarily fraudulent.

Perhaps I can be clearer. Say a FR bank holds a reserve ratio of X. If customers never redeem more than X% of their deposits at one time, then the bank will be solvent and is not fraudulent.

[DanielMuffinburg]

@Sage

@Daniel

Now, the bank can lend out two (or as many as it wants) notes, thereby, issuing pieces of paper that represent two ounces of gold. However, the problem is that there is only one ounce of gold in deposit and pieces of paper with full claim to that one ounce. However, that is a contradiction in rights and rights can’t contradicteach other.

My whole argument is that there is no contradiction in rights until the customers actually attempt to redeem their deposits.

So, in your example, say the bank has one ounce of gold, and lends out two notes to A and B. A goes on vacation to French Polynesia and never comes back. B can redeem his deposit whenever he wants. There are no problems with conflicting claims, and life goes on. This is not fraud.

But if A and B both try to redeem their deposit, then they will have competing claims, and the bank will fail. This is fraud.

Thus, FRB is not necessarily fraudulent.

Perhaps I can be clearer. Say a FR bank holds a reserve ratio of X. If customers never redeem more than X% of their deposits at one time, then the bank will be solvent and is not fraudulent.

That’s like saying that murder isnt murder unless the victim dies. Or that theft isn’t theft the until victim finds out about the theft.

[sthomper]

if depositors know that a bank doesnt have all of their money yet the bank communicates that they have all of a depositors money (via a statement or a account balance) -and- in order to ‘come up with the money’ the bank performs something similar to counterfitting (where counterfitting would be frowned upon by others) – all i can think of to call it is an “operational falsehood”

the bank operates falsely by indicating a given balance (money ammount) when they in fact do not have it and depoitors accept the falsehood.

unless i am missing something in the operation of a bank?

[hayekianxyz]

When an individual makes an irregular deposit contract, it stipulates that the bank must protect their services whilst keeping the full amount available to the customer, when a bank engages in FRB it makes the full availability impossible to all customers.

Also FRB sets in motion the exact cycle that results in large amounts of money being withdrawn from banks, namely the business cycle.

The argument you presented misses the point, a more correct argument would be:

1. If one breaks the rules of the contract for personal gain that individual is guilty of fraud,
2. You have broken the rules of a contract whilst taking payment for the services you are not providing,
3. You are guilt of fraud.

[scineram]

@Daniel

That’s like saying that murder isnt murder unless the victim dies.

Yes. LOL!

[scineram]

@GilesStratton

When an individual makes an irregular deposit contract, it stipulates that the bank must protect their services whilst keeping the full amount available to the customer, when a bank engages in FRB it makes the full availability impossible to all customers.

The only obligation is to be available when asked for withdrawal.

@GilesStratton

If one breaks the rules of the contract for personal gain that individual is guilty of fraud,

This is false.

@GilesStratton

You have broken the rules of a contract whilst taking payment for the services you are not providing,

As said above there is no violation.

@GilesStratton

You are guilt of fraud.

Not by this argument.

[hayekianxyz]

@scineram

The only obligation is to be available when asked for withdrawal.

No, it’s not. Moreover the bank, by only holding fractional reserves is never able to make sure this is always possible, especially not since it initiates a process in which reserves are withdrawn in large amounts.

@scineram

This is false.

No, it’s not.

[Sage]

@Daniel

That’s like saying that murder isnt murder unless the victim dies.

Umm…

@Daniel

Or that theft isn’t theft the until victim finds out about the theft.

I think this analogy fails for the same reasons as the trespass one above. While theft immediately violates the property rights of the victim, it is still logically possible for a FR bank to exist without going bankrupt (if customers never redeem more than X% of their deposits at one time, where X = reserve ratio).

@GilesStratton

when a bank engages in FRB it makes the full availability impossible to all customers.

This is only true when deposits withdrawn at any one time are greater than the bank’s reserves. For example, if the bank holds 10% reserves, and customers withdraw 50%, then the bank will fail. This is fraud.

But when deposits withdrawn at any one time are less than or equal to the bank’s reserves, it is fully possible for the bank to operate indefinitely, while customers can always redeem their deposits on demand. So if the bank holds 10% reserves, and customers never withdraw more than 5% at any one time, the bank will never go bankrupt. In this scenario the bank is fully providing their service of making deposits available on demand.

Thus, Premise 2 of your syllogism doesn’t work, because the bank is providing the service.

@sthomper

if depositors know that a bank doesnt have all of their money yet the bank communicates that they have all of a depositors money (via a statement or a account balance) -and- in order to ‘come up with the money’ the bank performs something similar to counterfitting (where counterfitting would be frowned upon by others) – all i can think of to call it is an “operational falsehood”

If a FR bank states that it will maintain 100% reserves, then I agree, it is fraud. But if the bank only maintains the obligation to redeem deposits on demand, then it is not necessarily fraud (see above). I don’t think the bank’s printing new money is counterfeiting, because they openly promise to redeem the notes. Only when the bank fails to redeem the notes is it fraud. But, as I’ve argued, there are scenarios where FR banks can fully satisfy their customers’ demand for withdrawals, and hence FRB can be legitimate.

So, it seems that FRB is just a risky business: if they succeed, they’re legit, but if they fail, they’re criminals. Managers beware!

[nirgrahamUK]

@Sage

I think this analogy fails for the same reasons as the trespass one above. While theft immediately violates the property rights of the victim, it is still logically possible for a FR bank to exist without going bankrupt (if customers never redeem more than X% of their deposits at one time, where X = reserve ratio).

Sage, i think the the trespass analogy is valid, and the others that were mentioned could be reformed into being effective, but were poorly worded.

here is perhaps a superior analogy.

you make a contract with someone to keep their car in your garage until they come and claim it back, and they will pay you 5$ a month for this.

the car is driven into your garage.

you hire out the car to someone for 2 months.

now, if the carowner demands the car after month 1 the fraud is detected, if the carowner demands the car after month 3 the fraud is not detected.

yet still fraud has occured as the deal was to have the car in the garage available and returnable at any time its claimed back, and this wasnt so, there were 2 months when it was not so available.

[hayekianxyz]

@Sage

This is only true when deposits withdrawn at any one time are greater than the bank’s reserves. For example, if the bank holds 10% reserves, and customers withdraw 50%, then the bank will fail. This is fraud.

But when deposits withdrawn at any one time are less than or equal to the bank’s reserves, it is fully possible for the bank to operate indefinitely, while customers can always redeem their deposits on demand. So if the bank holds 10% reserves, and customers never withdraw more than 5% at any one time, the bank will never go bankrupt. In this scenario the bank is fully providing their service of making deposits available on demand.

No, the demand deposit contract is not a loan contract, is it not an exchange of present goods for future goods. A demand deposit is a title to present goods, it allows the holder to claim present goods at any time, by the nature of FRB the bank cannot honour all these contracts, it needn’t come to a bank run, the bank simply isn’t honouring all the claim to present goods that it has contracted for.

Also FRB sets in motion the business cycle, so it is theoretically improbable that the banks won’t fail.

@Sage

Thus, Premise 2 of your syllogism doesn’t work, because the bank is providing the service.

No, the service is access to present goods, which the bank isn’t providing.

[DanielMuffinburg]

If you have a demand deposit for one ounce of gold, wherein the contract states, “one ounce of physical gold is stored in the bank’s vault”, but that ounce of physical gold is not in stored in the vault nor does it exist, then that is fraud. The fact that the depositor has not found out about the fraud makes no difference as to whether it is fraud or not.

[scineram]

@GilesStratton

A demand deposit is a title to present goods

And what exactly are these present goods?

@Daniel

If you have a demand deposit for one ounce of gold, wherein the contract states, “one ounce of physical gold is stored in the bank’s vault”, but that ounce of physical gold is not in stored in the vault nor does it exist, then that is fraud. The fact that the depositor has not found out about the fraud makes no difference as to whether it is fraud or not.

Which is why almost no one makes such contract nowadays.

[hayekianxyz]

@scineram

And what exactly are these present goods?

What a fucking stupid question.

[eliotn]

@scineram

And what exactly are these present goods?

whatever the bank wants to make these present goods (usually gold/money).

[Spideynw]

FRB is not fraud unless the bank makes a promise it does not intend to keep. So, if it promises to redeem all deposits on demand, when in fact it was lending out all the money, than that would be fraud. My point is, a bank cannot both promise to redeem all deposits on demand and at the same time invest any of the money it has. A true bank would simply charge a fee for keeping the money safe and available on demand. Banks should not be involved in lending money, because then it becomes an investment institution, not a bank.