“The moment in time which is stipulated is “anytime”. Hence, it’s not enforceable on the stipulated moment in time.”
<= I would say that this misunderstands the time implied in the concept ‘on demand’. It means that there is a definite time period: when the owner demands it. That’s when he acts upon it. I find it curious to understand that you guys insist that all notes should be redeemable on any given time in the absence of human action: it’s clear not everyone wants it ‘any time’ (they aren’t at the bank demanding gold), so why should it be there ‘any time’ in the absence of people wanting it at that instant in time? Why not relating it to what people want: banks should be able to pay up any time someone is ‘there’ to trade in their bank liability?
I never quite got that part of the argument.
“Everyone. That doesn’t mean they will sue for fraud, however.”
But why? If the note says ‘will pay the bearer on demand x amount of gold’ and the bank is able to pay everybody on demand… Where is the fraud? Where is the right to sue? Because the bank ‘might’ not be able to pay up? Is that a legitimate accusation?
But this is precisely the argument. A bank cannot have more bankliabilities than it has gold unless there is FRB. The moment it engages in FRB, it cannot make the statement to customers: “you can redeem at any time.”
And the argument that I make is that if a bank does tell the honest truth and says “you will get your money back, pending supply/demand (your are essentially entering a lottery)” AND there is no governmental backstop to provide funds for failing banks, then no customer would ever agree to this.
FRB wouldn’t exist without a governmental backstop.
It’s true that in a fractional reserve bank it’s possible that not everyone gets his money back at a certain point in time - because the bank lend out parts of it. It’s not true, however, that ‘in the long run’ people won’t get their money back. If a bank lends out money, they have themselves liabilities from people who lend the money. So it’s not that you ‘don’t get your money’. It is, however, that it’s theoretically possible that you don’t get all the money back at any given time.
In return, for this kind of uncertainty, you get interest on your checking account (in stead of paying a fee at a wharehouse-bank.) This kind of deal might not look that attractive to you, but I don’t think it’s a priori certain that no one would agree to such a thing.
Of course; just like with a wharehouse bank with a savings account: it’s possible that your bank lends the money out to risky investments who won’t be able to pay up. But this problem will be present in all kinds of banks.
Well; I’ve clarified the kind of lottery above, which, imo, is different than the typical lottery.
I know the argument goes something like: ‘it cannot make the claim because there might be a possibility that everyone shows up at the same time and because of this possibility, it cannot make the promise’. But I don’t see this as really relevant: the thing I consider relevant is: does the bank actually respect the wishes of the people showing up at the bank? As long as it can, where is it in the wrong? Just because something might go wrong, doesn’t mean that it’s in the wrong as long as all contractual obligations are respected.
Ok, to be honest i think we are close enough to agreeing on what FRB is and what the causes and effects are of a bank going bankrupt. I think we are only disagreeing on terminology.
What about the point that FRB cannot exist without a governmental backstop? Do you have thoughts here?
On further thought on my end, maybe it would be possible to have FRB without a guaranteed government program/entity to go with it. Clients would simply have to trust that banks are monitoring their solvency in a prudent manner, just as other business must avoid bankruptcy. However, once one bank run were to happen, i can see a huge snowball effect, causing many more bank runs. This would kill the trust that clients have in FRB. This would either severely limit clients voluntarily agreeing to FRB, or would cause someone to claim that a governmental backstop is necessary and the public would not likely argue.
This is why I now state that a governmental backstop very likely follows FRB.
I do, I think it’s wrong. I think FRB is perfectly possible without a governmental backstop, similar to the scenario you sketched.
The point you make is correct as such, but I would add some nuances.
(1) Historically; banks where aware that this might happen. That’s why banknotes used to have sentences like ‘if it’s necassary, we demand some time to come up with the money’. That’s covering their own ass.
(2) Again: if we assume that all investments done by the bank are ‘save’ - no defaults - than there is no problem of paying back all bank liabilities as soon as all the loans are paid back. (When people start defaulting on their loans, there might be a problem. But again: that’s prudence of the bank itself.)
(3) You are correct that consumer preferences (and risks) would drive this process and if people are very prudent, then FRB won’t be that wide spread, or the reserve ratios would be pretty high.
Is it fraud when you make a statement that is historically false on its face?
Obviously, they CAN deliver. Most fractional reserve banks, even in the gold standard days, delivered most of the time.
There were hundreds, even thousands of banks. Only tens ever failed at one time. the vast majority never failed from bank runs. And the panics that led to those runs were generally a decade apart, meaning they fulfilled everyone’s needs for 3,650 days in between.
With the existence of lenders of last resort as a private industry, even that need never happen again, in this day of electronic media.
They CAN deliver, and as a proportion of all transactions, almost always did.
But is it fraud when you promise something where there is a chance you deliver and you actually manage to deliver?
Again: banks are not promising ‘we can pay everyone back on any given time!’ (‘and check our vaults if you don’t believe us! We have exacty the amount of gold in the vault as people have liability notes!’) That’s not what they are saying. What they are saying is: we promise to pay everyone back on demand. And as long as they are good on that promise, where is the fraud?
And if you don’t think that’s what they are saying, just imagine a contract that says exactly that. Why would that be fraud?
Again, I note that in 1907, private industry functioned as the “backstop”, and had attempted less effectively to do the same thing in 1893. It took them two tries to “get it right”, and would have continued to improve, creating a whole industry of lenders of the last resort that insured banks.
Ironically, the existence of the industry would have more or less perfectly eliminated its use, so that bank runs would have mostly ended.
Unfortunately, the socialists were in charge at the time, and decided to set up a government agency to monopolize on the now-proven idea of a lender of last resort preventing bank runs…the Fed…in 1913.
I agree now. However, a couple things. The bank would have to be absolutely clear that “while customers can choose to redeem at any time, the bank may not have the money, because the bank only holds xx% of reserves on hand.”
Otherwise, I don’t see a problem in the free market for FRB or a problem in terms of fraud, as long a bank clearly tells it’s customers that they engage in FRB.
Historically, I do not know if banks ever made such a clear statement, or if they even make one now.
Although this is not a praxeological answer: historically, this was pretty clear (especially when you also had wharehouse banks.) And it’s quite clear today now too. Again, when I started dugging into this discussion, I just read the contract with my own bank and there is a proviso in it. (I’m aware that this is in the current governmental oriented system, but it’s still illuminating. Saying that banks cheat because people don’t know they are fractional reserve is, however, incorrect. It states quite clearly - in my contract at least.)
If you want historical references; lawrence white is the one you want ‘(larry white’).
When you promise something that is impossible because you never had any intention of living up to this promise, then…
One thing is for certain, the nature of the promise cannot change on account of whether (or when) the promise is redeemed. You have to understand this point before it is even worth arguing over anything else.
Then why is it fraud when 25 people show up at your door?
I don’t need you to answer this. It’s just to show you that this argument contradicts your other argument. Two contradictory arguments being made for the same thing.
Logically speaking, such a contract (or a set thereof, taken together) contains a contradiction. “When the owner demands it” is not a definite time period at the start of the contract or at any point in time until the fulfillment of the contract. Until then, it’s most certainly indefinite.
Why should “on demand” imply anything other than “at any time, period”?
The contracts, taken together, cannot be satisfied at any and all times. Some of them must be mutually exclusive. I’d take the fact that they were all fulfilled to be irrelevant.
So you take the fact that a contract is respected to be irrelevant for the question wether or not it ought to be legal for such contracts to exist?
Why?
Just because it’s possible a contract is not respected, doesn’t mean it should be illegal, now does it?
You say ‘logically speaking, it contains a contradiction’, but that’s not the case. That would be the case of people retain ownership - like within a wharehouse. But something that is logically impossible is just that: logically impossible. We know, however, that it’s not logically impossible to respect any and all contracts at the same time. As long as anyone that shows up gets his money.
I really don’t get that you say ‘I’d take the fact that they were all fulfilled to be irrelevant’. Why is that? Isn’t the core of a contract?
Well; banks can live up to the promise. It is, in fact, possible to redeem everyone on demand.
The nature of the promise doesn’t change. It remains the same ‘everyone will get something when they show up with their bank liability’.
There is no contradiction. Saying ‘we will pay everyone back on demand’ is not the same as promising ‘we will be able to redeem all notes on any given time, even if people don’t show up. Come check our vaults if you don’t believe it.’ The first one might entail the second one - if everyone shows up at the same time - but it’s not necessary. (While, obviously, the second one must entail the first one.)
As soon as the bank can’t fulfill their contract, they are deceiving people. We both can agree on that. I just don’t see why they are defrauding people. Explicitly saying ‘I don’t care if the contract is respected, it’s still fraud!’ just doesn’t make sense to me.
The only promise they made is this: when you show up, you’ll get something. And as long as they are good on this promise, they are respecting their part of the deal.
I don’t just refuse to call oranges - cars - for arbitrary reasons.
Their notes will no longer maintain the same ‘parity’ with the fixed amount of specie. If we can agree that 1oz of gold has a fixed ‘parity’ with 1 oz of gold, that is, a fixed parity with itself. Obvious enough?
Then multiple notes with ink on them that says 1oz cannot possibly maintain the same fixed ‘parity’ with 1 oz of gold as does 1oz of gold with1 oz of gold, for the same reason that your 1oz gold bullion coin, say American Eagle, is not worth today its fixed fixed $50 face value, but $1400!
Your bank notes with clauses is not fractional reserve banking anymore if what it produces is not fiduciary media, but at best, some currency of its own with a fluctuating parity with gold, and at worse, sells some type of lottery game tickets where people wait to see who flinches first. Totally nonsensical!
Not when 25 people show up, by your own admission. You still want to claim that you are not contradicting yourself even though you are as close as one can be to explicitly assert that a != a.
If you want to take back your original claim for fraud when 25 people show up, then go ahead and do so. But I won’t be engaging in such an argument where we just go back and fourth writing stories to each other.
No. I don’t agree with this at all. It is totally false.
So it is impossible for it to be fraud when 25 people show up and not fraud when only 24 people show up. Again, to claim otherwise, is to contradict yourself again: “The nature of the promise doesn’t change.”
It’s true that - in the hypothetical scenario I sketched - when 25 people arrive, there is a problem. 25 people have a promise - ‘will pay the bearer on demand x’ - and the bank can’t fulfill their promise. Nobody is denying that this is, indeed, problematic.
It doesn’t follow, however, that the bank can not fulfill their promises per se. If only 24 people - or any number below - show up, they can fulfill all their promises. They promised 70 people to pay the bearer on demand something and all 70 of them are still good. As soon, however, that the bank is unable to perform her duty - when someone shows up, but the bank can’t give him the required stuff - than we have a problem.
Again: the bank is not promising ‘we will have everything in our vault’. They are promising: ‘we will pay the bearer on demand’. Nothing more, nothing less. And as any good entrepreneur; they have to estimate how much money they need in their vault to respect all the demands on any given moment.
The way I see it: (1) the promise is ‘will pay on demand’. This is the only thing they are promising. And as long as they can hold that up, they aren’t defrauding anyone. That’s the difference between promising ‘I will pay you something on demand’ and ‘I will have x amount of that in the vault’.
I do agree that we are running in circles. So we can just leave it at that.