I had a convo on Reddit about how FRB would exist in the free market. While I admittedly have thought little on the topic, I had heard that FRB could be considered fraud. I said that to him. He replied that in that case banks would just add it into their consumer agreements. My answer then is that it still makes no sense, because you can’t have two people that both have a full claim to a single piece of property.
Am I on the right track, or are there better explanations of FRB under free markets?
Well, there are people like Selgin who define FRB to be the same as lending, but then say that FRB is not lending because… it’s not lending although their definitions are the same.
Whoever thinks that FRB is fraud has never heard of insurance. There is not one insurance company on earth right now, nor has there ever been one, that can pay all the claims it has promised to pay if they all come due now. This is FRB, in a sense, and, as an insurance professional, I can assure you that insurance would be dead if the Rothbardian ban on FRB was consistently carried out.
This is bogus. If one believes that 100% reserve banking will work out best in the market, let him try his luck when we get a free market in banking. But trying to forcefully keep banks form operating under a FRB model tells you something about his true belief in the viability of 100% reserves.
I don’t have it clear about why some consider FRB fraud even when all is spelled out.
That said, insurance is a different kettle of fish. Your argument is like saying all casinos are fraudulent, because if every slot machine gave a winning outcome, every roll of the dice and spin of the roulette wheel and hand of blackjack beta the hous, all at the same time, then the casino would not be able to meet its obligations.
Insurance companies do not take the full value of the policy from every customer in advance. In fact they don’t do it for any customer. The agreement is “Give us a few dollars a month. We owe you nothing until event A happens. You have no claim whatever until evcent A happens. It’s all 100% our money until then.” By careful study, the company has a good estimate how often event A will happen in the course of say, ten years, and keep that amount in reserve. But the point is, until event A happens, nobody can say, “Give me my money.” So there is no fraud. And there is plenty of money always available to meet every happening of event A.
Banks are different. From the instant a depositor hands them over some cash, he has an immediate sword over their heads. They owe him all the money right then, redeemable on demand. I imagine Rothbard understands this to mean that they are obliged to take steps to ensure they can meet their obligation to pay out on demand. But with that obligation hanging over them, they empty their coffers anyway.
Certainly not. I mean that they are so focused on strict FRB not to notice that insurance operates on the exact same principle. I surely do not see what’s particularly insulting here.
that is surely a difference between the two, and we can probably go on to point many others. But I feel this does not touch the heart of the matter. Anyway, let us suppose it is.
When, is the insurer turned into a FRB, by such a standard as that you propose: when 100 cars get stolen at the same time? What good is to ‘forbid’ its operation than (let’s assume we’re both for forbidding FRB)? Its going under anyway. If any forbidding is to be done, it must surely be at the very begiging, before an insurer gets a chance to defraud its customers in the future: we must ask of an insurer to hold not reserves as they do now, but the full value of all Sums Insured (it’d surely make my job easier). And the industry is gone.
This is a meaningless difference, for our purposes.
The insurer says to 100 people: I will give you each 100 dollars if your car is stolen. If all 100 cars get stolen, I do not have 10’000 dollars to pay. I’m promising to deliver something I can’t if something outside of my control happens.
The fractional reserve banker says to 100 clients: I will give you back your 100 dollars whenever you ask for them. If all ask, I do not have 10’000 dollars. I’m promising to deliver something I can’t if something outside of my control happens.
The trigger is different: theft vs. redemption. One is controlled by the client, the other is less so and this makes for interesting actuarial differences. But so what? In both cases I promise something I can pull off only if my prediction about the probability of the trigger is right.
Ok than, let us put it in such terms. You rightly say that the bank owes you the full amount, while the insurer owes you only what you’ve paid as long as there’s no claim (let us suppose away the fact that it could owe you the whole sum insured). Cool.
Now, does the fact that the bank owes you your money mean that it is required to physically keep it at hand at all times? If so, than the insurer too should be required to physically keep the money you paid to them at hand, and get it as the policy gradually lapses.
By this interpretation every loaned object should than be kept physically at hand. This is not the requirement of the current accounting framework: all that is required is that the loan be offset by an asset under you control, a very, very different requirement indeed.
So, let me ask, do you think a defender of 100% reserves would, in order to deny the similarity between FRB and insurance for our purposes, advocate that every loaned object be kept at hand, else there be calls of ‘fraud’?
“But you can claim you deposit back at any time, so it’s different for banks”. Not at all, for you can also cancel you policy at any time requiring the unearned premium back.
So, is it only to FRBs that the requirement to hold the loaned object at hand at all times applies?
See, this difference is besides the point in our discussion: FRB is the same as insurance.
The difference is that, in banking, one presumably still owns the money that he deposits at a bank; while in insurance, one no longer owns the money that he pays to the insurance company.
Now, if banks want to treat their depositors’ money as no longer being owned by their depositors, they should make that very clear. Otherwise, I think there’s a fraudulent situation.
“But you can claim you deposit back at any time,…"
Which makes it different from “every loaned object”
Not at all, for you can also cancel you policy at any time requiring the unearned premium back.
Not sure I understand. If I pay the insurance company, say, $20 a month, then I can ask come after a few months and say “Give me all my money back”? I doubt this is the case.
Or do you mean that if I pay six months in advance, then after say 4 months I can cancel and ask for $40 back, the amount due for the next two months? Even in such a case, it is not the same as depositing in a bank. there is a clear, if subtle difference, which I shall explain.
With the insurance policy paid six months in advance, there is a presumption and a status quo, which is that I will keep the policy till the six months are over. Cancelling, as the very word implies, means the creation of a new situation. The company merely has an obligation to cover for the likelihood, statistically, of cases that will cancel [if that].
With banks, there is no presumption of anything. I did not specify for how long I intend to keep the money in the bank. [Unlike the six months I specified in advance to the insurance company]. So they are obliged to have it around at the drop of a hat.
Parenthetically, I may add that runs on banks are not unheard of. They happen every few years. So the banks cannot say the odds are that i will be OK with 10% reserves. But I have never heard of mass cancellations of insurance policies paid in advance. But I don’t think this last is the real difference. Rather, the main thing is what I wrote in the previous paragraphs.
But let me ask: if I told you that you can cancel a policy at any time, for any reason, and you’re entitled to get back whatever premium is left (if you canceled at mid-term you get back half the premium), just as you can call you deposit whenever you feel like it, wouldn’t you agree that, for all practical purposes, in both cases you have the same amount of ‘ownership’ in the money you give? Is there any practical difference?
So the only difference is that you can call it back whenever you like?
But I failed to see how that was any different form cancelation of a policy: I’m entitled to get back the unearned premium (the part of premium proportional to the days left until the policy cancels). So, you can think of 30 days policy a policy as 1/30 payment and 29/30 deposit on day one. The next day you pay an other 1/30th , and you’re left with a deposit of 28/30.
The thing is that there is a deposit component there which is, for all practical purposes, the very same as any liquid bank deposit. Why, then, not require insurers to physically hold UPR (this is what the sum of all current deposit parts is called) as physical money, right there in the company safe?
And let’s not even start with perpetual policies that never mature, where you’re entitled to get back all of the premium. An exact bank deposit.
Yes, the practical difference is that I no longer own money that I owned before I deposited it at the bank, in spite of the fact that I (presumably) didn’t deposit my money with the bank so that they could own the money instead of me.
I wrote more in my last post. There is a section beginning with the words “With the insurance policy paid six months in advance, there is a presumption and a status quo,” etc. That’s the key difference.
As for “practical purposes”, the last paragraph of my previous post addresses the practical difference. But I think the practical difference of less importance than the distinction I made about presumption and status quo.
What if property owners in anarcho-capitalism want to allow FRB in their lands? If they have right to do it, I really can’t tell why ancaps are so heavily against FRB. Preventing FRB would be easy in minarchy, but you can’t prevent it on anarcho-capitalism.
Sorry I missed that, I thought that you considered the ‘presumption’ part the less important part of the argument.
Anyway, if all we can muster to tell FRB from insurance apart is such a presumption (I find it reasonable, but beside the point), (leaving the calculations part, which you touched, aside) than it all boils down to contract wording, which removes all needs form presumption of any kind.
The “problem” is that a defender of 100% reserves will not take that, as FRB is supposed to be inherently fraudulent, with no contract between the depositor and the bank able to make up for that. Anyway, I enjoyed the arguments.
I think we too have reached the same conclusion as with Dave, that all that allows for a difference between insurance and FRB is the presumption that you’ll stick with the policy to the end. Translated to the words of a hypothetical strict anti-FRB advocate, this means that he presumes FRB to be fraudulent and insurance not to be, and that no contract wording can change that, and that’s that. Not to be too surprised, perhaps.
