Preventing FRB in free markets

[Autolykos]

@Merlin

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.

If “banking” is taken to mean “the business of safeguarding other people’s money”, and money is a form of property, then “fractional-reserve banking” is contradictory to the given definition of “banking” and thus is inherently fraudulent.

That aside, if the banking contract stipulates that the depositor no longer owns money that he deposits with the bank, then I don’t see this per se as fraudulent. It’s only when accepted legal definitions of words like “bank” are taken into account that it could be considered so. Hopefully this makes sense.

[mikachusetts]

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.

Arguing about whether or not fractional reserve banking constitutes fraud is useful if you’re discussing law or ethics, but I don’t think its very helpful in determining whether or not it would occur in a free market. The better way to approach the issue is, if legally permitted (but not protected), would FRB take hold in financial institutions. I think its likely that it would.

The issue of two or more people each having full claim to the same piece of property is much less of an issue when the property is fungible. Bank notes don’t entitle the bearer to that dollar, but rather to any dollar. So long as there is more money available then there are individual seeking to redeem money certificates, there really isn’t a problem. If it does cause an issue, and bank runs are a regularly occuring event, then it really doesn’t matter if FRB is fraud because no bank would want to deal with such a risk.

[Merlin]

Autolykos , I know that you do not agree with the strict anti-FRB guys because you said so, and so our exchange (as with Smiling Dave) is funny because we agree yet we still discuss.

What I was curious about was actually how one such a strict anti-FRB guy might argue against FRB in all cases, regardless of whether both the bank and the client agree to terms specified in advance, and yet allow for insurance to exist. I think our exchange yielded some results: I still think that they are the same in their core (if not in the details), yet he’d probably say something to the tune of “insurance is just supposed to be different, the money is theirs, while the deposit is yours, because I think so” or make some other such point, wholly unsatisfactory to my mind.

[Autolykos]

@Merlin

Autolykos , I know that you do not agree with the strict anti-FRB guys because you said so, and so our exchange (as with Smiling Dave) is funny because we agree yet we still discuss.

Oh. Sorry if I misunderstood that!

@Merlin

What I was curious about was actually how one such a strict anti-FRB guy might argue against FRB in all cases, regardless of whether both the bank and the client agree to terms specified in advance, and yet allow for insurance to exist. I think our exchange yielded some results: I still think that they are the same in their core (if not in the details), yet he’d probably say something to the tune of “insurance is just supposed to be different, the money is theirs, while the deposit is yours, because I think so” or make some other such point, wholly unsatisfactory to my mind.

Honestly, I think he would say that fractional-reserve banking in all cases is fraud because he adheres to something like the definition of “banking” I gave earlier, and he refuses to consider any alternative definition.

[Merlin]

Indeed, that’d probably be the way it would go.

[Autolykos]

@mikachusetts

The issue of two or more people each having full claim to the same piece of property is much less of an issue when the property is fungible. Bank notes don’t entitle the bearer to that dollar, but rather to any dollar. So long as there is more money available then there are individual seeking to redeem money certificates, there really isn’t a problem. If it does cause an issue, and bank runs are a regularly occuring event, then it really doesn’t matter if FRB is fraud because no bank would want to deal with such a risk.

Whether an object is considered to be economically fungible makes no difference to the issue of who owns the object. But maybe that’s beside your point.

On another note, I see no reason why different banks’ bank notes must all be considered equally fungible with one another. If free banking does arise in a free-market, stateless society, I wonder if there might be different exchange rates between the bank notes of different banks and gold (for example). These exchange rates would reflect people’s attitudes about the stability and creditworthiness of the different banks.

[500NE]

Isn’t one of the strikes against FRB that it engages in money creation when making loans?

They lend out more money than they actually have in the vaults. Creating money out of thin air - held in check only by whatever reserve requirement they or someone else limits them to.

In effect inflating the money supply, and doing on a smaller scale what a central bank does.

If it is unsound economically for a government to do it, why it it suddenly ok for a private bank?

I guess it can also depend if you define money creation as counterfieting…

[Physiocrat]

To the fraudulent nature of FRB, one way to look at it is with time deposits. Suppose A lends the Bank £100 for one year but then the bank lends this £100 to C for two years. The bank is claiming ownership of the £100 for longer than the agreed period and is hence fraudulent.

FRB is this writ large: the £100 is being lent for an infinitiely small period of time (i.e. warehousing) but then being lent out for a longer period. Further there’s the issue of money creation.

The distinction I see with insurance is as follows: with say one year’s worth of car insurance it is not necessary that the insurer will have to pay out- you might not crash- unlike in the banking scenarios above where there is definite time period in which an obligation needs to be contractually fufilled.

Saying that you will meet someone and Saturday knowing that you have a mutually exclusive obligation to head to the office is clearly lying. If heading to the office is a possibility, but not necessary, then that would be perfectly permissible.

The only fuzziness would arise if A lend the bank £100 for an indefinite time period. You could consider instant access savings accounts an example of this but this is solely supported by FRB et al.. If you are lending you would state a payback period plus interest otherwise this would be an odd investment decision.

That said it is possible, but most likely on a small in-house friends and family basis, and it would not be fradulent for the borrower to lend the money out to someone else for an indefinite period. However there will always be a necessary obligation to pay down the line unlike insurance where all claims are contingent- I could insure the car over my lifetime and never make a claim. If you argue in the indefinite period there’s little or no likelihood of paying it back it would more properly called a gift and analysed as such.

For more on Fraudulent time deposits see these two excellent papers by Block and Barnett. Copy and paste the titles into youtube and you’ll find the pdfs.

Barnett, William and Walter Block. Forthcoming. “Financial Intermediaries, the Intertemporal-Carry Trade, and Austrian Business Cycles; or; Crash and Carry: Can Fraudulent Time deposits lead to an Austrian Business Cycle? Yes.” Journal Etica e Politica / Ethics & Politics

Barnett, William and Walter Block. 2008. “Time deposits, dimensions and fraud,” Journal of Business Ethics;

[Merlin]

@Physiocrat

The distinction I see with insurance is as follows: with say one year’s worth of car insurance it is not necessary that the insurer will have to pay out- you might not crash- unlike in the banking scenarios above where there is definite time period in which an obligation needs to be contractually fufilled.

Two questions, if you will.

1. In a given year, you might decide not to cash the deposit either, just as you might no t crash the car. Why, then, if we assume you have a 10% probability of crashing you car in a year or retrieving the deposit, we must tell these apart?

2. What about whole life insurance, which the company must pay sooner or later (you will die, sooner or later)? Are these insurers to be forced to hold the sum insured as physical cash right there? If not, why not?

[Physiocrat]

@Merlin

1. In a given year, you might decide not to cash the deposit either, just as you might no t crash the car. Why, then, if we assume you have a 10% probability of crashing you car in a year or retrieving the deposit, we must tell these apart?

Do you think that it is not the case that the bank claims £100 for longer than the agreed period if A lends it to the bank for 1 year and then the bank lends it to B for two years? If so there is no categorical difference between that and FRB. Also cashing the deposit is a loaded term since it is debatable whether a deposit is in fact cash.

@Merlin

2. What about whole life insurance, which the company must pay sooner or later (you will die, sooner or later)? Are these insurers to be forced to hold the sum insured as physical cash right there? If not, why not?

That would be similar to my lending for an indefinite time period which I said would be permissible anyway. Also it is possible that people will cancel their whole life insurance- thus the total payout for life insurance is contingent not necessary.

Further in the case of insurance nobody is claiming ownership of cash longer than the agreed period: I pay my £100 per month and when I die you will pay £10,000. If you the insurance company cannot afford it that isn’t fraud, just insolvence.

What you are attempting to do is to say that deposits are just lending for an indefinite period of time which they could be depending upon the agreement. In this case however the accounts of both would have to be clear to avoid third parties being defrauded. So any cash held in the indefinitely lend account must be considered the entire property on the bank, not the lender, until it is called instantly back in part or whole.

[Autolykos]

@Physiocrat

What you are attempting to do is to say that deposits are just lending for an indefinite period of time which they could be depending upon the agreement.

This. “Could be” isn’t the same as “are”, Merlin. I just want to make sure you understand that.

[Merlin]

@Physiocrat

What you are attempting to do is to say that deposits are just lending for an indefinite period of time which they could be depending upon the agreement. In this case however the accounts of both would have to be clear to avoid third parties being defrauded. So any cash held in the indefinitely lend account must be considered the entire property on the bank, not the lender, until it is called instantly back in part or whole.

Nooo, come on man, I thought I’d found a strict anti-FRB advocate, not just an advocate of proper contract wording, just as myself

Are strict anti-FRB guys so hard to come by these days?

[DanielMuffinburg]

It’s difficult to debate non-anti-FRB people (like Selgin) because you can’t get past establishing definitions.

[Merlin]

@Daniel Muffinburg

It’s difficult to debate non-anti-FRB people (like Selgin) because you can’t get past establishing definitions.

I’m sure the feeling is mutual.

[500NE]

For me, the question is: does FRB engage in money creation.

[Physiocrat]

500,

Given my provisos above it would not. Further given my provisos FRB is in fact not an accurate term. FRB would only exist if the money was deposited, not lend for an indefinite period, and lend out which is fradulent and wouldn’t occur in the free market whereas banks lending money which was lend to them for an indefinite period would exist. The question then arises of how prevelant lending for an indefinite time period would be.

[z1235]

@Wheylous

He replied that in that case banks would just add it into their consumer agreements.

Sure. Just like Madoff could have as easily added this to his investor agreement: “I could do whatever I want with your money, but will do my best to pay it out to you (+ intrerest) whenever you demand it back.” No one could sue him for fraud then, but no one would have “invested” with him as well.

As I said, these FRB debates exist only out of narrowmindedness and looking back in the rear view mirror. The whole jargon of “banks”, “notes” and “substitutes” implies that the only way savers (lenders) could meet with entrepreneurs (borrowers) is through a Ponzi scheme – that conflicting property claims are inherent to “banking” and a prosperous society. This just shows how deeply brainwashed the masses have become by the Ponzi cartel over the centuries.

With advances in technology and market interconnectedness – where all sorts of instruments are developed, as we speak, to meet savers of capital with employers of same – I predict that FRB would be laughed out of a free market, like a bad joke. No need to “prevent” it.

[chezguerilla]

Shoplet Brings the Full Line of Acme United Products. Shoplet Brings Full Line of Avery Products to its Customers. See what Daily Radar has to say about Tony Ellison Shoplet.

[500NE]

Ah, but you have to add all those provisos to the point that FRB is no longer FRB banking as it is commonly known.

FRB as is commonly known engages in inflationary practices through money creation. To me this is the real fraud.

Why make things complicated? Why have all the different provisos and contract clauses?

100% reserves banking works with transparent simplicity. Banks make loans by offering cd’s and such of varying maturities, or out of their own profits made by charging fees for storing money.

I have a hard time understanding the need by some to complicate things when a simple solution is readily avaliable.

[JackCuyler]

@z1235

Sure. Just like Madoff could have as easily added this to his investor agreement: “I could do whatever I want with your money, but will do my best to pay it out to you (+ intrerest) whenever you demand it back.” No one could sue him for fraud then, but no one would have “invested” with him as well.

It still would be fraud against the recipient(s) of the loaned funds. For example, say you deposit $25,000 in the bank, which then loans $20,000 to Wheylous. Wheylous writes a check to purchase a car from me. I now own that money, without any contractual agreement that the bank “does its best” to give it to me. If enough depositors withdraw even some of their money, the bank will not be able to satisfy its obligations to me.