Definition of FRAUD
1
a : deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right
b : an act of deceiving or misrepresenting : trick
2
a : a person who is not what he or she pretends to be : impostor; also : one who defrauds : cheat
b : one that is not what it seems or is represented to be
Who is misrepresenting what?
I think contracts that have been deemed invalid would, in effect, be banned. The idea is that, given a precedent in judging the validity of such a contract, later contracts which are deemed to take the same form will face the same judgement. Note that this is different from passing legislation. Any society that I (at least) would call “libertarian” wouldn’t have any legislation.
What makes it most likely to be popular? I’m not claiming that the scenarios you outlined are impossible – I’m claiming that 1) you seem to claim that they’re not only possible, but deterministic, and yet 2) you have provided no basis for the deterministic nature of these scenarios.
There’s no reason to believe that no full-reserve bank would ever allow non-checking accounts. In any case, while it’s certainly possible that full-reserve banks would charge percentage-based fees for holding checking accounts, that doesn’t mean they all necessarily will.
No, you didn’t – at least not as far as I can tell. Otherwise I wouldn’t have asked.
Technically, if more gold gets withdraw than a given branch’s reserve has stored, that branch has indeed run out of gold.
In any case, I fail to see how it can be proven that a lender of last resort (or the lender of last resort) can never, ever run out of gold itself. Historically, the US government closed the gold window in August 1971 because the lender of last resort in the US, the Federal Reserve, apparently ran out of gold or was going to.
How can you prove that the lender’s assets would be large enough to cover any one bank run? Thus how can you prove that there’d never be any reason for people to go on a bank run? I fail to see the applicability of your alleged Chevy analogy.
My point was that you seemed to be “arguing” that, since it’s the 21st century, all banks should or must be fractional-reserve banks. This is not a logical argument whatsoever.
Since I’m not a mind-reader, how about you explain it for me? Or are you actually not interested in your opponents being able to understand your statements?
Interesting way to put it. Would you agree, then, that the kind of fractional-reserve banking scheme you proposed does not keep one’s money safe? Furthermore, if one considers “banking” to be “the business of safekeeping others’ money”, then what you proposed isn’t banking at all?
While I agree that voluntary guarantees and/or health/safety ratings would be commonplace among restaurants, my point was that I consider it extremely unlikely that any private court would judge that a person has no recourse against a restaurant which served him poisoned food if the restaurant made no guarantee of the food’s safety. Indeed, were a court to rule otherwise (as I think it would), this would establish a precedent for restaurants to be held to an implicit promise against poisoning customers.
I agree with you here.
Well, I do agree that modern bankruptcy procedures would exist in a free-market society. I’m not sure if bankruptcy is a “socialist” concept, however – I guess it depends on how you define “socialist”.
Which fallacy do you think he committed, exactly? What is this “15th century scenario” you’re talking about? Why does it matter whether banks ever worked a certain way in the history of the United States or any other country?
Yes, actually you’re right. I was mistaken about the common meaning of “mollify”. I stand corrected. “Intimidate” should be used instead.
To me, whether a lender of last resort runs out of gold (or Microsoft runs out of ability to support Windows) is an entirely separate issue from fraud. Sorry if I didn’t make that clear.
According to Jörg Guido Hülsmann, the fraudulent activity of earlier bankers was made legitimate by the local governments. This apparently allowed the fractional-reserve banking activity to continue (relatively) unabated.
Of course, in the absence of hard historical sources, YMMV here.
I never said there was anything wrong with making such a stipulation per se, did I? As I’ve mentioned before, however, there could be other legal considerations at work, such as the going legal definition of “banking”. So while the stipulation itself isn’t fraudulent, the business may be engaging in some kind of fraudulent activity if it’s calling itself a “bank” but not engaging in what’s legally considered to be “banking”.
Now that I think about it, it seems that your dispute with Rothbard is really a semantic one. Rothbard uses a definition for “banking” that, in your eyes, is “primitive”. You prefer to use a more “modern” definition. However, neither definition is correct – they’re only different.
Kaz,
What examples of Free Banking exist that are not examples of lending?
Kaz (and Adrian), i am so very close to agreeing with you guys, but Kaz’s statement in the quote above is where you are being unclear on what is happening in FRB.
Kaz says it is not fraud because the client knows what is happening. This has been my point for most of the thread: If the bank only says “you can redeem your money on demand, period” then its clients DO NOT know that the fractional reserve banking is happening. All i say is that the bank make it very clear that the client can try to redeem on demand and has the option to redeem on demand, but also that they tell all their clients this same thing, while holding <100% of reserves.
And if you argue the following… well today everyone knows that banks engage in fractional reserve banking and they don’t keep your dollars aside for you only, that is irrelevant.
It is irrelevant because today, people don’t care that banks hold less than 100% of reserves because of government backstops like the FDIC, Federal Reserve, etc.
The real question is: forget about the government backstops in place today and ask yourself "is it fraudulent for a bank to take on deposits, tell all clients that they can redeem on demand, hold <100% reserves, without telling the clients that they hold <100% reserves?
It is fraudulent if the don’t make the clients aware of this, and Kaz, from your statement i believe you agree.
hold<100% is basically Kaz’ “pending supply”. NO? Is there a difference?
I suppose if you are telling someone that you are ripping them off then one may justify that it isn’t fraud under the banner: One person’s trash is another’s treasure, that we can’t know the preferences or the value other’s attribute to a specific commodity or service. I am sure I read this in Gene Callahan’s “Economics for Real People.”
i agree. no difference. maybe i am mixing Adrian with Kaz but i am certain that Adrian said that if a bank said “you can redeem on demand, period” then there would still be no fraud.
I do belive Kaz said that the bank would have to disclose that it holds <100% of reserves, but Adrian did not if i remember correctly.
Then what is the difference between
"on demand, pending supply" and just “pending supply”
They seem to be identical conditions for redemption according to you (and Kaz, and maybe some others here). No?
Edit: This is a very important question by the way.
I’ve stopped following the discussion, but if the institution would say ‘pending supply, you are able to turn it in your note’, is there a problem than?
If not; than there we go. We have got the possibility of a fully functioning banking system based on fractional reserves.
The only thing customers would need than is some sort of contractual obligation that the bank is required to be able to pay all bank notes ‘in the long run’, which is an easy clause to add.
“pay … in the long run”, “pending supply”, … these are all descriptions of not perfectly liquid goods. A good that is not perfectly liquid cannot be money (or its substitute). It’s no different then simply saying that a good that is not money cannot be money.
I don’t see much difference other than… Doesn’t on demand mean that there is no time period that the depositor must wait before redeeming?
If so, then there is no difference that i see
The issue is that Adrian explicity said before that it would not be fraudulent for the bank to say “you can redeem on demand, period”
I feel the issue is that the “pending supply” part must be there. But Adrian may have changed his mind according to his last post…
I agree. But before you explicitly said that the bank would NOT have to say “pending supply” and that they could just say “you can redeem at any time, period.” If you agree that “pending supply” must be disclosed then yes i agree there is the possibility of a fully functioning banking system based on fractional reserves.
How is this an easy clause to add? “in the long run” is vague and not specific. How do you enforce or tell if a bank is fulfilling notes “in the long run?” I don’t think this clause needs to be added at all. If banks are holding less than <100% reserves and telling customers that they are doing it, this clause is not needed.
"“pay … in the long run”, “pending supply”, … these are all descriptions of not perfectly liquid goods. A good that is not perfectly liquid cannot be money (or its substitute). It’s no different then simply saying that a good that is not money cannot be money. "
<= Since when did human action requires something to be ‘perfect’? Some people won’t accept my Euro. Still money, though.
Further; just because it’s not ‘perfectly’ interchangeable at a bank, doesnt mean it can’t be used as a general means of indirect exchange, i.e. money. It can be, at the same time, be liquid, i.e. be used for indirect exchange and not be able to redeem it in full on all possible times at a bank.
Furthermore: a bank will have every incentive to make sure you are in fact able. When I enter a bar, drinks are also only avialable pending supply. They have every incentive to make sure they have every drink though.
“How is this an easy clause to add? “in the long run” is vague and not specific. How do you enforce or tell if a bank is fulfilling notes “in the long run?” I don’t think this clause needs to be added at all. If banks are holding less than <100% reserves and telling customers that they are doing it, this clause is not needed.”
Change ‘in the long run’ by any specific time period. Problem solved.
Yes, change it to ‘before you die’ (after all, Keynes taught us that we’re all dead in the long run) and you’ll never be defrauding a living client. Problem solved.
Z.
I was thinking more along the lines of ‘3 months’ or something.
Money is the general medium of indirect exchange. Wether it represents a bank liability that means the bank has to pay up within a certain amount of time or represents gold in a vault (warehouse-bank) or even if it represents chairs at ChairsInCo doesn’t really matter, as far as I can see.
As long as people value the thing it represents in a general way, it doesn’t really matter what it represents.
Hell; it could even represent ‘nothing’ if people accept it as a general medium of exchange.
Edit: Just checking: did you call me a Keynesian?
Edit2: For the record, this is a different kind of argument and position then I was defending earlier.
If we accept the Austrian definition for money as a general means of indirect exchange and if we accept that it’s only relevant that it is the general medium of indirect exchange, how could we exclude a priori something that is logically conceivable. Gold in a vault - warehouse - certainly is conceivable. (Credible) commitments by a company to back something up (‘we try to do it on demand, but it might take a few months, in rare occasions! But you will get it within x amount of time!’) certainly counts as conceivable too, as far as I can see. And this might have some advantages (no storage fees) that the other system doesn’t have, while at the same time have some disadvantages (higher uncertainty). And than it comes down to consumer preferences. Does this work for you guys?
“on demand, pending supply” = “pending supply”
A= “on demand”
B= “pending supply”
According to you:
AB=B
This means that A=B.
“on demand” = “pending supply”
(it matters not for this example if AB is A AND B, or A OR B)
Do you understand why?
Now, what must 'not on demand’ equal to according to you?
if A=B then
not A= not B
“not on demand”=“not pending supply”
So a bank claim redeemable “not pending supply”, which is what 100% reserve is, would now be a claim redeemable “not on demand”. While it is FRB that is now offering redemption “on demand”. Interesting conclusion.
Are you satisfied with this rather absurd result? Do you see now that “on demand, pending supply” is a logical self-contradictory statement, and therefore, impossible to carry out?
Even with today’s technological and financial advancements, the whole concept of banking (as we know it) would be non-existent in a free market. I see no reason to expose my assets to lottery-like (and ownership title-questionable) schemes such as FracRB when I could just as easily pay a financial services provider to allocate my assets in and out of instruments with varying liquidity and risk profiles (stocks, bonds, ETFs, cash, loans, private equity, private loan pools, investments, etc.). As financial markets become ever more liquid, transaction costs converge to zero, at everyone’s benefit. Why do you think FracRB is even needed at all? What demand does it satisfy which is not much easier achievable via other (and ever more abundant) means?
Sure, except free market consumers stupid enough to “invest” via FracRB would not remain solvent long enough to support it for too long. There’d be no one left to defraud as all idiots would be bust before long.
Z.
DD5,
Honestly, that was not necessary. You are just trying to find ways to sound smart, i think? i meant that the important part of the statement is: “pending supply” and if “redeem on demand” was not included it would only be because it’s obvious and assumed.
If a bank said “you can redeem pending supply” but didn’t say anything about whether this also means “on demand” or after a certain time period, then that obviously begs to question, “ok, when can i redeem pending supply?”
My point is that the on demand part is pretty obvious.