Precisely, my friend! There’s nothing at all wrong with either your wording or mine. They are just unneeded clauses, as such arrangements are implied anytime you transact with a limited liability company. You don’t need to spell them out at all, that’s all.
That can’t be true. You can contract with someone in collusion to rob a 3rd party. This is fine?
In other words, a clause that says I retain the right to retrieve my deposit, as long as there is money available in the bank. Banks are allowed to deffer or refuse payments under your contract. Very well, but there are no such clauses in our world of Fractional Reserve Banking. The contractual obligations of bank deposits violate a serious rule of sound financial management.
Here is how Rothbard explains it:
Another way of looking at the essential and inherent unsoundness
of fractional reserve banking is to note a crucial rule
of sound financial management - one that is observed everywhere
except in the banking business. Namely, that the time
structure of the firm’s assets should be no longer than the time structure
of its liabilities. In short, suppose that a firm has a note of $1
million due to creditors next January 1, and $5 million due the
following January 1. If it knows what is good for it, it will arrange
to have assets of the same amount falling due on these
dates or a bit earlier. That is, it will have $1 million coming due
to it before or on January 1, and $5 million by the year following.
Its time structure of assets is no longer, and preferably a bit
shorter, than its liabilities coming due. But deposit banks do not
and cannot observe this rule. On the contrary, its liabilities - its
warehouse receipts-are due instantly, on demand, while its
outstanding loans to debtors are inevitably available only after
some time period, short or long as the case may be. A bank’s
assets are always “longer” than its liabilities, which are instantaneous.
Put another way, a bank is always inherently bankrupt,
and would actually become so if its depositors all woke up to
the fact that the money they believe to be available on demand
is actually not there.12
This is where your mistake is. You are ignoring the function of contracts. The violation of the rule of sound financial management is a direct result of a violation of a contract. It does not matter what you think you know that the bank is doing with your money or what you think are the risks before you agree. The contract explicitly defines its liability to you in a way that the bank cannot possibly observe. The proof is in the rule violation described above. What you think both parties know before the agreement is immaterial. The contract is all that matters in any legal dispute.
You could avoid the fraudulent or ambiguity of the contract by adding the proper clauses, which you don’t want. Why not? I hear things like “it is implied”, “people know the risks”, etc… It is exactly the purpose of contracts and why they were invented; to explicitly, and not implicitly, define the terms of agreement.
If we follow your reasoning to their natural conclusions, then we don’t need contracts at all. All business can be conducted by gentlemanly verbal agreements and goodwill will be sufficient to regulate the market. In theory it’s possible, but the free market has proven written contracts as an innovative tool to protect property rights and settle disputes. it is likely to continue to use such tools.
Goliath National Bank is thereby obliged to pay the bearer of this note on demand 5 ounces of gold.
Signed: directors.
No clause?
What clause?
deferral or suspension of payment in the case of blah blah blah…
I could add that but unnecessary. It is simpler this way.
I think I was not clear. When I said “voluntarily agreed to etc.” I meant that it’s all in writing, of course.
The point I’m trying to make is that fraud means trickery. If the details of FRB are all explicitly in writing in advance, there isn’t any fraud. The impression I got, including from Rothbard, is that the situation of FRB, in and of itself, constitutes fraud, even if it’s all spelled out in writing in advance.
It’s even simpler if we do away with the contract all together.
George Selgin himself doesn’t agree with you. In reference to bank runs, he states the following:
Banks in a free banking system might however avoid such a
fate by issuing liabilities contractually subject to a ‘restriction’
of base money payments. By restricting payments banks can
insulate the money stock and other nominal magnitudes from
panic-related effects. (Selgin, “Free Banking and Monetary
Control,” p. 1455)
from DD5: You could avoid the fraudulent or ambiguity of the contract by adding the proper clauses,
This is the key line. We are in agreement.
from DD5: which you don’t want.
Sure I do.
My version of the contract might be: Depositor Dave can ask for his money back on demand. The bank can lend it out to anyone [call him Mr X] for any length of time in the hopes Dave won’t ask for it back until the loan to X is repaid, or that the bank will have the money some other way.
Should Dave ask for his money and we are totally out of funds, the same laws apply as when any borrower doesn’t have the money to repay his debts.
Your version has “ask on demand” and not “redeem on demand”. I assume that was intentionally.
Fine. Your version no longer causes the time structure of the banks assets to be longer then its liabilities. But it’s precisely because the deposit is no longer a demand deposit. I hold the view that such a system cannot evolve in a free market, and if it did, it would be an error to call it fractional reserve banking.
As I wrote in previous post, we have agreed that if its all in writing its not fraud. Which is all I was trying to say.
The subtle distinction between ask and redeem zoomed right by me. I think I mean redeem on demand, meaning he can walk out of the bank on the spot with the money as soon as he asks for it. That’s the situation Rothbard calls fraud, and that I think is not fraud if its all spelled out in writing in advance.
It’s not so subtle. It’s the difference between a warehouse receipt and something completely different.
I don’t like that. It’s not his money after all.
You mean your dollar bills have your name on them? You get the very same one you deposited when you withdraw?
They can prove the bank gave out your money and it is very stupid on the bank’s part, because if they would be giving away more money than they had. If they gave two people 100 dollars and they only had 50 dollars in the begining, they would be 150 dollars in debt because of themselves. Also, it can be proved because, historically, people do runs on a bank where they all go to withdrawal at once and prove the banks are doing this. Therefore, it is fraud, and the bank can be caught and sued. That is exactly what the Fed does now, it creates fake wealth. Why have the free market make the same mistakes, it does not make it right. A bank that does this would be stupid for jeapordising itself and would create fake wealth like what happens today.
You cannot give out $200 if you only has $50.
for any single house how many deeds could be sold?