Friday, December 16, 2011

Callable Option Loans and Fractional Reserve Accounts

Consider the following comment made by a commentator on a previous post:
“I am saying that, economically, … [sc. loans with a callable option] are no different from demand deposits, or putting one’s money underneath one’s pillow, or one’s wallet, or one’s backyard. Economically equivalent concepts cannot be altered just because they are named differently.

Contracts that are ‘loans with a perpetual call option,’ with no minimum time period, with no exchanging of control for a minimum time period, are, economically speaking, not loans, because at no time does the depositor forsake control or exchange control over the money.”
You can follow the link and read the whole tiresome exchange.

There is something very wrong with this analysis above, and here is why:
(1) If you were to keep your money in a chest in your house or buried in the ground on your property, then the following applies:
(i) Fundamentally, you still own and retain possession of the money as an asset.

(ii) this is merely the holding of an asset you own. It is certainly the hoarding of money as well, and the money involved would be idle, in the sense that it is not being (a) invested in capital goods production for a return, or (b) spent on consumer goods (and it is not even being used to buy a financial asset on a secondary market or second hand good).

(iii) You get nothing in return (no services or goods) in an interpersonal exchange here: and of course there is no interpersonal exchange at all. You also get the same money you dig up or remove from the chest.
(2) In a fractional reserve (FR) transactions account or loan with a callable option (which are both mutuum loans), you have
(i) relinquished ownership rights over any money you lent. The FR account is not a bailment at all, and it certainly requires that you have also lost possession of the money. In exchange for the money lent, you obtain an IOU, a debt instrument we call the FR account, which is merely a debt on the bank’s books. You are now faced with the risk of default, to varying degrees depending on the FR system involved. There is no risk of default in money hoarded in your house, as it is not even a loan.

(ii) Unlike hoarding of money you own at your house, the bank has lent out most of your money since it now has ownership rights. In fact, this is the purpose of banking: “the very essence of banking is to receive money as a [m]utuum” (MacLeod 1902: 318). Money is “sold” to the bank as a mutuum and is to be returned in genere (“in general form”) as a tantundem, which means you do not necessarily get the same money back, but just an equivalent amount with interest. The money has been lent for (a) consumer loans, (b) capital goods investment loans, or (c) purchasing of financial assets which the bank holds as assets on its balance sheet. Some of the original money is retained as reserves held by the bank as money they own, either as vault cash or reserves at the central bank.

(iii) Unlike the hoarding of money at your house (which is holding of your own property), a mutuum loan to the FR bank (either as a FR account or callable option loan) is an exchange of present for future goods, in which you give up the ownership and possession of your money (the present good) in exchange for the future goods that are

(a) interest and/or

(b) banking services (see also Rozeff 2010: 509, as a critique of Mises 2009: 269), e.g., use of cheques, a debit card (which these days allow you to purchase goods via the internet), electronic funds transfer overseas, and often foreign exchange transaction services without charge or little charge compared to other businesses. The most important service that banks offer is, of course, ease in making payments, without holding cash, by cheques or (in earlier periods) private banknotes.

(c) a debt instrument, your FR account. For many people, this frees them from actually holding and storing money in safety at home or on their person, and worrying about whether money they hold might be stolen. The FR account also allows you to call back your loan money in whole or part, if you wish to, as a future good that is the tantundem (not the same money you lent, but different money of the same quantity). This has historically freed people from the inconvenience of holding cash on their person to make payments as well, with the advantage of earning interest on the money given as a loan.
It should be noted that both banking services and interest are certainly future goods. In the case of interest payments, there is also usually a specified date when it will be paid. Thus the denial that future goods are not obtained in exchange for the money lent is absurd.

(3) the act of calling back your FR account loan (in whole or part) or callable option loan is different from merely digging up money buried in the ground: the former constitutes demand for repayment of a debt, and in certain historical FR systems there was the very real risk you might not be repaid. There is a significant difference between calling back a loan (with an element of risk) and merely holding a thing in your own possession (with the comparative security of direct holding).

(4) Finally, the idea that “‘loans with a perpetual call option,’ with no minimum time period, with no exchanging of control for a [sc. fixed] minimum time period, are, economically speaking, not loans, because at no time does the depositor forsake control or exchange control over the money,” if taken seriously, logically requires that all callable option loans must be made illegal by the private law code of any hypothetical anarcho-capitalist society. This appears to be the position of Huerta de Soto (2006), Walter Block and William Barnett (2009), and is attacked by George Selgin and Lawrence H. White here and here. I quote Selgin:
“If De Soto’s position is in fact that callable loans are ipso-facto illegitimate, then that position is even less tenable than I once supposed. For now it isn’t just a question of wishing to suppress fractionally-backed bank deposits, but of wishing to suppress all call loans, starting with brokers loans (which have long played a very important role in financing securities trades) but also including callable bonds and many other non-bank intermediated securities.

With respect to these call loans, there is no question of the ambiguous or deceitful use of the term ‘deposits.’ What’s more, the agents who deal with them include many of the most sophisticated players on the financial scene. Finally, it is well understood that while the ‘callability’ of the loans in question exposes borrowers to an additional risk, the extra risk in question is compensated by lower interest terms than would accompany corresponding time loans. In other words, the call feature is part of a mutually advantageous exchange.”
George Selgin, Comment @May 28, 2009 at 8:21 am, on Joseph Salerno, 2009. “White and Horwitz on Hoppe,” Mises.org, May 18.
But my main conclusion here is as follows: the idea that, “economically speaking,” loans with a callable option and FR demand deposits are equivalent to “putting one’s money underneath one’s pillow, or one’s wallet, or [sc. in] one’s backyard” is untenable.


BIBLIOGRAPHY

Block, W. E. and W. Barnett, 2009. “Time Deposits, Dimensions and Fraud,” Journal of Business Ethics 88.4: 711–716.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1889437

Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala

MacLeod, H. D. 1902. Theory and Practice of Banking (6th edn), Longmans, Green, Reader, & Dyer, London.

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.

Rozeff, M. S. 2010. “Rothbard on Fractional Reserve Banking: A Critique,” Independent Review 14.4 (Spring): 497–512.

30 comments:

  1. Lord Keynes, are you not going to post my reply in the other thread? It seems you have just concentrated on debating ChristofKeynes

    ReplyDelete
  2. Lord Keynes:

    "There is something very wrong with this analysis above, and here is why:"

    "(1) If you were to keep your money in a chest in your house or buried in the ground on your property, then the following applies:"

    "(i) Fundamentally, you still own and retain possession of the money as an asset."

    To someone who thinks that economically speaking, a demand depositer also still owns and retains possession of the money as an asset, this first reason doesn't suffice.

    If you say they don't retain possession, because they have to drive to their bank, which takes time, then I can say that one also has to walk to their mattress, which takes time. It's not unique to FR accounts.

    ReplyDelete
  3. Lord Keynes:

    "(ii) this is merely the holding of an asset you own. It is certainly the hoarding of money as well, and the money involved would be idle, in the sense that it is not being (a) invested in capital goods production for a return, or (b) spent on consumer goods (and it is not even being used to buy a financial asset on a secondary market or second hand good)."

    Since as a Keynesian you don't understand how to integrate time into your analysis (as was shown in your last blog post), it's not surprising that you would also be confused about the nature of money holding as well.

    ALL money is held as cash, i.e. "hoarded" for at least SOME positive amount of time. Money could not even be money if it didn't have a "storage value." Money that didn't have a storage value would not be sought after to be owned at all, and would collapse as money.

    Furthermore, you say that money held underneath a mattress is "idle money"? On what basis? That it isn't being invested or spent? Well duh, if you were to take a snapshot of all money that is owned, at any given time, ALL money is not being used for transactions. All money is held as cash. All money is "hoarded."

    Transactions take up only a minor percentage of the time that passes. Most of the time, money is held as cash. The only times that money is used for transactions are the split second time periods where money changes ownership. In fact, since such transfers are practically instant, it means that for all intents and purposes, transactions are like points separated on a line, and the line itself is the time that money is "hoarded."

    What if the person who holds their money under their mattress is intending to spend their "hoarded money" sometime in the future, but you just so happen to observe them at a time when they are holding their money under their mattress? It would be silly to ignore their intentions, and only focus on seeing the money sitting there.

    Since people who hold money are clearly doing so because they intend to use it sometime in the future (or else they would not even hold the money now and throw it in the garbage), it is WRONG to claim that such money is "leaked" out of the "money spending stream."

    You need to understand the difference between holding money for the purposes of spending it later, and holding money for the purposes of spending it sooner. It is dumb to say that someone who is holding money under their mattress is hoarding it and never makes it into the spending stream.

    You know how I know you are confused? All I have to do is ask you this:

    How much time is required to identify a particular sum of money someone owns, from "money for transactions" into "money for hoarding"? One day? One week? One month? One year? Any time period you pick will invariably be completely arbitrary and subjective. Since the individual determines value, and since that is the subject matter of economics, it means that if someone wants to hold a sum of money for 1 second, or 1 decade, you have nothing to say here except one person wants to hold a sum of money longer than 0.000000000000000000000000000000000000000000000000000000001 seconds, and another wants to hold a sum of money longer still.

    You cannot say the first guy isn't hoarding money, while the other guy is hoarding money, because that would require you to put an objective frame of reference on time and hoarding, which is silly, since the value of time is subjective to the individual.

    Why is holding money at a bank, which is then lent out after, say, one week, considered "not hoarding", but holding money underneath one's mattress, which is then spent, say, one week later, considered "hoarding"?

    ReplyDelete
  4. Lord Keynes:

    "(iii) You get nothing in return (no services or goods), and there is no exchange involved. You also get the same money you dig up or remove from the chest."

    There is what Mises called an autistic exchange taking place, where the individual is exchanging present consumption for future consumption. And there is a "return", if you properly understood the meaning of "return" in economics. In economics, not all returns have to be monetary or material. Humans act to achieve what Rothbard called "psychic profit." If I give away money to charity, and derive satisfaction/utility, then that would the the "return" to my action. I don't need to get paid something back in order for me to achieve a goal I had. Yes, money making is also a goal, but money making cannot be claimed as the only way anyone can become better off. Some people are willing to invest in a company that incurs losses because the company is engaging in activity the investors deem worthwhile.

    So the fact that you get no monetary return from holding money doesn't mean you aren't making a positive return for yourself in terms of what you want to accomplish. If I hold more money because I want to consume more in the future, in exchange for less consumption in the present, then that IS me making a gain for myself.

    Not everything has to earn a material return from others in order to be beneficial to people. Should I be punished in any way because I held onto my body and did not let others use it? Should I be punished if I held onto my computer and did not sell it? Should I be punished if I held onto ANYTHING and did not use it? If so, WHY?

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  5. Christof @December 16, 2011 1:39 PM

    To someone who thinks that economically speaking, a demand depositer also still owns and retains possession of the money as an asset, this first reason doesn't suffice.

    So now the issue here is whether they do in fact retain ownership?

    Banking practice and European law/legal theory has seen the fractional reserve account as a loan where ownership rights pass to the bank since the Roman Republic:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/if-fractional-reserve-banking-is.html

    If you say they don't retain possession, because they have to drive to their bank, which takes time, then I can say that one also has to walk to their mattress, which takes time. It's not unique to FR accounts.

    That is NOT why they "don't retain possession" of the money. I reject this reason: it is straw man.

    ReplyDelete
  6. Lord Keynes:

    "(2) In a fractional reserve (FR) transactions account or loan with a callable option (which are both mutuum loans), you have"

    That's begging the question, because the conclusion of your argument is that FR accounts are loans. You still have to justify that claim.

    "(i) relinquished ownership rights over any money you lent. The FR account is not a bailment at all, and it certainly requires that you have also lost possession of the money. In exchange for the money lent, you obtain an IOU, a debt instrument we call the FR account, which is merely a debt on the bank’s books. You are now faced with the risk of default, to varying degrees depending on the FR system involved. There is no risk of default in money hoarded in your house, as it is not even a loan."

    This is all just restating your definition of what to call an account where the client deposits money but retains present control over it due to it being available to him at any time he wants it, i.e. on demand.

    "(ii) Unlike hoarding of money you own at your house, the bank has lent out most of your money since it now has ownership rights."

    False. You don't know what someone will do with their money once they put it under their mattress. You're fallaciously claiming that keeping money underneath one's mattress is never going to be used. If you respond and say "I'm not saying it's never going to be used", then I will just say "then why are you artificially separating holding money into "hoarding" and "transactions", when you just admitted that money held under a mattress will be used eventually?

    Not all money has to be used ASAP, that is, spent as practically soon as someone receives it, in order for the economy to be maximally productive. It fact, if that were the case, then the economy would become terribly unproductive, since the monetary system would collapse.

    This is just your confusion concerning money again. Money is not a consumer good. It is a medium of exchange. If people hold money for longer instead of sooner, then that means they want to spend more money in the future and less money today. If people holding more money were not interfered with by force of government, then this will send signals to investors to invest in more longer term projects, and fewer short term projects. Why should the government force shorter term projects through inflation, if the people want longer term projects?

    ReplyDelete
  7. Lord Keynes:

    "In fact, this is the purpose of banking: “the very essence of banking is to receive money as a [m]utuum” (MacLeod 1902: 318). Money is “sold” to the bank as a mutuum and is to be returned in genere (“in general form”) as a tantundem, which means you do not necessarily get the same money back, but just an equivalent amount with interest. The money has been lent for (a) consumer loans, (b) capital goods investment loans, or (c) purchasing of financial assets which the bank holds as assets on its balance sheet. Some of the original money is retained as reserves held by the bank as money they own, either as vault cash or reserves at the central bank."

    I will just say:

    In fact, this is the very purpose of money. Holding it until such time as the owner deems it fit to be used in transactions, in accordance with his time preference and accommodating for his level of uncertainty.

    If a person reduces his investment and holds more cash, yet keeps his consumption unchanged, then this will send signals to investors to invest in more shorter term projects (in my last post I assumed increased cash holding came only from reduced consumption, but that's not necessary as people can also reduce their investment), and to reduce their bidding prices for capital assets.

    If a person reduces his consumption and holds more cash, yet keeps his investment unchanged, then this will send signals to investors to invest in more longer term projects, and to reduce their bidding prices for capital assets.

    If a person reduces BOTH his consumption AND his investment, leaving the ratio between consumption and investment unchanged, then this will send signals to investors to retain the same time horizon for investments, and to reduce their bidding prices for capital assets.

    "(iii) Unlike the hoarding of money at your house (which is holding of your own property), a mutuum loan to the FR bank (either as a FR account or callable option loan) is an exchange of present for future goods, in which you give up the ownership and possession of your money (the present good) in exchange for the future goods that are"

    "(a) interest and/or"

    "(b) banking services, e.g., use of cheques, a debit card (which these days allow you to purchase goods via the internet), electronic funds transfer overseas, and often foreign exchange transaction services without charge or little charge compared to other businesses (see also Rozeff 2010: 509). The most important service that banks offer is, of course, ease in making payments, without holding cash, by cheques or (in earlier periods) private banknotes."

    "(c) a debt instrument, your FR account. For many people, this frees them from actually holding and storing money in safety at home or on their person, and worrying about whether money they hold might be stolen. The FR account also allows you to call back your loan money in whole or part, if you wish to, as a future good that is the tantundem (not the same money you lent, but different money of the same quantity). This has historically freed people from the inconvenience of holding cash on their person to make payments as well, with the advantage of earning interest on the money given as a loan."

    Again, you're just defining FR accounts to be future goods, without showing the economics of it. Why is an account where the client can take possession of money on demand, why is that a future good, and not a present good?

    The only answers you have this far given are that time passes and there is risk of loss. But both of these are also present with holding money under your mattress, so they can't be distinguishing characteristics!

    ReplyDelete
  8. "That's begging the question, because the conclusion of your argument is that FR accounts are loans. You still have to justify that claim."

    LOL...
    (1) Mises himself says that "It is usual to reckon the acceptance of a deposit which can be drawn upon at any time by means of notes or cheques as a type of credit transaction and juristically this view is, of course, justified" (Mises 2009: 269). So do you dispute that in legal terms it is a loan?
    If you agree with Mises, then clearly in legal term IT IS A LOAN.

    (2) Banking practice - and not just law - for over 2 thousand years has treated the handing over of money to a banker in a "sealed or locked up or otherwise covered or secured in a package, cask, box, bag or chest" as a bailment and unsealed money as a mutuum.

    The traditional and practical method, going back not just to medieval Europe but even to Roman days, by which money brought to a bank was determined to be a bailment was whether it was sealed in a box/bag:

    "when one deposits money with a money-changer who has constant and immediate use and need of money in his business, it is presumed that the bailor has deposited such money with the express intention of permitting the bailee to make use of the same whenever he would so desire, and then the latter becomes liable in any case in the capacity of debtor. When, however, the money so deposited is contained in a sealed or privately knotted bag, this indicates the intention of the bailor that he has not consented to the money-changer‟s making use of the same

    Hyman E. Goldin, Mishnah; a digest of the basic principles of the early Jewish jurisprudence, Baba Meziah (Middle Gate), order IV, treatise II, New York & London, 1913. p. 68.

    This principle, as described above, was recognised in Talmudic law, as it was from the Jewish community from which many medieval bankers came.

    However, it goes back to Roman times, entered European civil law, and it was still cited by American judges in the 19th century in Dawson et al vs. the Real Estate Bank before the Supreme Court of Arkansas in 1845:

    "From a careful consideration of the authorities on this subject, we understand the general rule to be, that where money, not in a sealed packet, or closed box, bag or chest, is deposited with a bank or banking corporation, the law presumes it to be a general deposit [= mutuum loan - LK], until the contrary appears; because such deposit is esteemed the most advantageous to the depositary, and most consistent with the general objects, usages, and course of business of such companies or corporations. But if the deposit be made of any thing sealed or locked up or otherwise covered or secured in a package, cask, box, bag or chest, or any thing of the like kind of or belonging to the depositor, the law regards it as a pure or special deposit [= bailment - LK], and the depositary as having the custody thereof only for safe keeping, and the accommodation of the depositor.” (Pike 1845: 296–297).

    The question whether the mutuum was a demand deposit (callable loan) or time deposit would depend on the type of verbal or written contract.

    Thsi is why freely consenting clients and bankers understood fractional reserve accounts/loans, in real world actions.

    Do you dispute this?

    ReplyDelete
  9. Lord Keynes:

    "(3) the act of calling back your FR account loan (in whole or part) or callable option loan is different from merely digging up money buried in the ground: the former constitutes demand for repayment of a debt, and in certain historical FR systems there was the very real risk you might not be repaid."

    Again, you're just claiming that they are different on the basis that you are merely defining FR accounts as debt. You're still begging the question.

    This is your circular logic:

    FR accounts are debt.

    Why?

    Because FR accounts are debt.

    "(4) Finally, the idea that “‘loans with a perpetual call option,’ with no minimum time period, with no exchanging of control for a [sc. fixed] minimum time period, are, economically speaking, not loans, because at no time does the depositor forsake control or exchange control over the money,” if taken seriously, logically requires that all callable option loans must be made illegal by the private law code of any hypothetical anarcho-capitalist society."

    This is just a conclusion that is contingent upon the conclusion of whether or not loans with a perpetual call option are in fact "legitimate", in the economic sense and hence in the legal sense (if one does not try to enforce laws that contradict economic laws of course).

    This statement does not itself constitute a premise for your position. All you're doing is saying "Those who argue FR is fraud would have to outlaw its practise." Well duh, that would of course follow.

    "This appears to be the position of Huerta de Soto (2006), Walter Block and William Barnett (2009), and is attacked by George Selgin and Lawrence H. White here and here. I quote Selgin:"

    "If De Soto’s position is in fact that callable loans are ipso-facto illegitimate, then that position is even less tenable than I once supposed. For now it isn’t just a question of wishing to suppress fractionally-backed bank deposits, but of wishing to suppress all call loans, starting with brokers loans (which have long played a very important role in financing securities trades) but also including callable bonds and many other non-bank intermediated securities."

    I think De Soto would say that if any of those "loans" contained the caveat that the "lender" retains the right to take possession of the money at any time they wanted, then I don't see how De Soto would be embarrassed about insisting that these contracts be considered illegitimate ones, and not enforceable.

    ReplyDelete
  10. "Again, you're just defining FR accounts to be future goods, without showing the economics of it.

    That is false: do you dispute that FR account holders get banking services and sometimes even interest in exchnage for their money loaned?

    Why is an account where the client can take possession of money on demand, why is that a future good, and not a present good?"

    (1) Because it is not a bailment, but a loan: the repayment is a tantundem

    (2) the account holder gets banking services

    (3) and sometimes interest.

    ReplyDelete
  11. Lord Keynes:

    "With respect to these call loans, there is no question of the ambiguous or deceitful use of the term ‘deposits.’"

    The same thing can be said about the "ambiguous and deceitful use" of the term "loan."

    "What’s more, the agents who deal with them include many of the most sophisticated players on the financial scene."

    How is that relevant to this discussion?

    I mean, some of the most sophisticated "players" in the military are psychopathic murderers. But that shouldn't be relevant to whether or not murder took place.

    "Finally, it is well understood that while the ‘callability’ of the loans in question exposes borrowers to an additional risk, the extra risk in question is compensated by lower interest terms than would accompany corresponding time loans."

    You forgot compensation from the taxpayer, and the Federal Reserve.

    "In other words, the call feature is part of a mutually advantageous exchange."

    If the perpetual call feature cannot be economically distinguished from a demand deposit whereby the client retains legal ownership, then I see no reason to even call it a loan to begin with, nor can I see any reason to believe that ownership rights have been transferred from client to bank.

    "But my main conclusion here is as follows: the idea that, “economically speaking,” loans with a callable option and FR demand deposits are equivalent to “putting one’s money underneath one’s pillow, or one’s wallet, or [sc. in] one’s backyard” is untenable."

    How so? You haven't shown how it is untenable, at least in this blog post.

    ReplyDelete
  12. "To someone who thinks that economically speaking, a demand depositer also still owns and retains possession of the money as an asset, this first reason doesn't suffice."

    "So now the issue here is whether they do in fact retain ownership?"

    Praxeologically (economically) speaking, yes, of course. That is what is going to determine my conclusion on whether I will consider FR to be fraudulent or not fraudulent.

    "Banking practice and European law/legal theory has seen the fractional reserve account as a loan where ownership rights pass to the bank since the Roman Republic:"

    Positive law is irrelevant. I am talking economics.

    "If you say they don't retain possession, because they have to drive to their bank, which takes time, then I can say that one also has to walk to their mattress, which takes time. It's not unique to FR accounts."

    "That is NOT why they "don't retain possession" of the money. I reject this reason: it is straw man."

    It's not a straw man. You said way before, in addition to other assertions, that FR accounts are future goods, and hence loans, because it takes time for the client to go and get his money from the bank since they don't have possession of the money.

    Have you now retreated from that position?

    ReplyDelete
  13. "You said way before, in addition to other assertions, that FR accounts are future goods, and hence loans, because it takes time for the client to go and get his money from the bank since they don't have possession of the money.

    Have you now retreated from that position? "


    The post above describes my considered position on it.

    The fact that you give up both goods now (that you could have purchased) and ownership of money in return for a debt claim giving you back money as a tantundem is ONE reason why itis a future good.

    ReplyDelete
  14. "Positive law is irrelevant. I am talking economics."

    What about the actual practices/actions of two freely consenting parties entering into a mutuum contract in the FR loan? The cneturies of the unsealed bag tradition? Even actual vast numbers of real world contracts in history where people have understood the giving of money to a banker as callable loan?

    ReplyDelete
  15. Lord Keynes:

    "That's begging the question, because the conclusion of your argument is that FR accounts are loans. You still have to justify that claim."

    "(1) Mises himself says that "It is usual to reckon the acceptance of a deposit which can be drawn upon at any time by means of notes or cheques as a type of credit transaction and juristically this view is, of course, justified" (Mises 2009: 269). So do you dispute that in legal terms it is a loan?
    If you agree with Mises, then clearly in legal term IT IS A LOAN."

    Mises here is just saying that positive law treats them as loans. Again, I am not talking about positive law. I am talking about the economics of it.

    "(2) Banking practice - and not just law - for over 2 thousand years has treated the handing over of money to a banker in a "sealed or locked up or otherwise covered or secured in a package, cask, box, bag or chest" as a bailment and unsealed money as a mutuum."

    Again, irrelevant. Banking practise, positive law, are separate from the economics.

    I don't care if murder has taken place "legally" by the state for 2,000,000,000,000 years. It's still murder.

    "The traditional and practical method, going back not just to medieval Europe but even to Roman days, by which money brought to a bank was determined to be a bailment was whether it was sealed in a box/bag:"

    Irrelevant. Status quo is an argumentative fallacy.

    I see you're running out of arguments and resorting more and more to fallacies.

    "when one deposits money with a money-changer who has constant and immediate use and need of money in his business, it is presumed that the bailor has deposited such money with the express intention of permitting the bailee to make use of the same whenever he would so desire, and then the latter becomes liable in any case in the capacity of debtor."

    OK, but then the depositer, economically speaking, cannot be considered someone who can ask for money on demand, and thus cannot be considered having control over a present good.

    "When, however, the money so deposited is contained in a sealed or privately knotted bag, this indicates the intention of the bailor that he has not consented to the money-changer‟s making use of the same"

    Positive law is irrelevant to economic principles.

    "This principle, as described above, was recognised in Talmudic law, as it was from the Jewish community from which many medieval bankers came."

    It's not a principle you laid out. You just laid out a past practise.

    "However, it goes back to Roman times, entered European civil law, and it was still cited by American judges in the 19th century in Dawson et al vs. the Real Estate Bank before the Supreme Court of Arkansas in 1845:"

    Positive law is irrelevant.

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  16. "If the perpetual call feature cannot be economically distinguished from a demand deposit whereby the client retains legal ownership, then I see no reason to even call it a loan to begin with, nor can I see any reason to believe that ownership rights have been transferred from client to bank."

    So now you're saying: "I don't even regard a freely-entered into callable loan contract by two parties as a loan" - despite your dithering in saying whether it is a loan or noton the last post.

    ReplyDelete
  17. Lord Keynes:

    "From a careful consideration of the authorities on this subject, we understand the general rule to be, that where money, not in a sealed packet, or closed box, bag or chest, is deposited with a bank or banking corporation, the law presumes it to be a general deposit [= mutuum loan - LK], until the contrary appears; because such deposit is esteemed the most advantageous to the depositary, and most consistent with the general objects, usages, and course of business of such companies or corporations. But if the deposit be made of any thing sealed or locked up or otherwise covered or secured in a package, cask, box, bag or chest, or any thing of the like kind of or belonging to the depositor, the law regards it as a pure or special deposit [= bailment - LK], and the depositary as having the custody thereof only for safe keeping, and the accommodation of the depositor.” (Pike 1845: 296–297)."

    This is not a justification.

    "The question whether the mutuum was a demand deposit (callable loan) or time deposit would depend on the type of verbal or written contract."

    Which is separate from the economics.

    "Thsi is why freely consenting clients and bankers understood fractional reserve accounts/loans, in real world actions."

    Historically, banks have typically kept this secret from their clients.

    "Do you dispute this?"

    I do not dispute any historical practise. I do not dispute any historical law. I do not dispute any historical definition.

    I only dispute your equivocating demand deposits as loans, in the economic sense, because economically, I see no difference (yet!).

    "Again, you're just defining FR accounts to be future goods, without showing the economics of it."

    "That is false: do you dispute that FR account holders get banking services and sometimes even interest in exchnage for their money loaned?"

    No, it's not false. You have just defined FR accounts to be future goods, and you justified this definition by referring to status quo.

    As for whether I dispute that FR account holders get banking services, and sometimes interest payments, I will say that I know it is irrelevant, so it doesn't matter whether I dispute it or not.

    "Why is an account where the client can take possession of money on demand, why is that a future good, and not a present good?"

    "(1) Because it is not a bailment, but a loan: the repayment is a tantundem"

    Again, that is just assertion by definition.

    "(2) the account holder gets banking services"

    Irrelevant.

    "(3) and sometimes interest."

    Also irrelevant.

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  18. "Again, irrelevant. Banking practise, positive law, are separate from the economics.

    (1) so actual law will not convince you.

    "> The traditional and practical method,
    > going back not just to medieval Europe but
    > even to Roman days, by which money brought
    > to a bank was determined to be a bailment
    > was whether it was sealed in a box/bag:"

    Irrelevant. Status quo is an argumentative fallacy.


    It isn't irrelevant: if two parties contract freely and voluntarily to do something and understand and regard the passing over of money as a callable loan and not as a bailment, the IT IS NOT FRAUD. Fraud is "intentional deception made for personal gain or to damage another individual". It cannot be regarded as fraud in that sense.

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  19. Patch said...

    Lord Keynes, are you not going to post my reply in the other thread? It seems you have just concentrated on debating ChristofKeynes

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  20. Lord Keynes:

    "You said way before, in addition to other assertions, that FR accounts are future goods, and hence loans, because it takes time for the client to go and get his money from the bank since they don't have possession of the money."

    "Have you now retreated from that position? "

    "The post above describes my considered position on it."

    Yes, but you have since clearly backtracked from it.

    "The fact that you give up both goods now (that you could have purchased) and ownership of money in return for a debt claim giving you back money as a tantundem is ONE reason why itis a future good."

    I know you said that was ONE reason, but I am considering your reasons one at a time.

    If I store my money underneath my mattress, I ALSO "gave up goods now that I could have purchased." So it's not unique to FR accounts.

    The rest of your reasoning above in the quote is just another insistence on defining FR accounts as debt, which is begging the question.

    "Positive law is irrelevant. I am talking economics."

    "What about the actual practices/actions of two freely consenting parties entering into a mutuum contract in the FR loan?"

    You are again begging the question. You are again defining FR accounts as debt. That is the issue I am intending to settle here.

    "The cneturies of the unsealed bag tradition?"

    Positive law is irrelevant. For centuries women couldn't vote, and black people couldn't be free.

    "Even actual vast numbers of real world contracts in history where people have understood the giving of money to a banker as callable loan?"

    You mean like the vast numbers of real world contracts in history where people bought and sold slaves?

    History is irrelevant.

    "If the perpetual call feature cannot be economically distinguished from a demand deposit whereby the client retains legal ownership, then I see no reason to even call it a loan to begin with, nor can I see any reason to believe that ownership rights have been transferred from client to bank."

    "So now you're saying: "I don't even regard a freely-entered into callable loan contract by two parties as a loan" - despite your dithering in saying whether it is a loan or noton the last post."

    No, I said I see no reason to call it a loan in the economic sense. I am not saying people haven't called them loans, or that they weren't enforced as loans.

    I am still on the fence here. I see no reason to agree with your claim that FR accounts are loans, in the economic sense.

    I've given you ample opportunity and time to convince me otherwise, so it's not like I am as closed minded as you seem to be, such that you insist on asserting from definitions and positive law.

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  21. "The cneturies of the unsealed bag tradition?"

    Positive law is irrelevant. For centuries women couldn't vote, and black people couldn't be free.


    False: the sealed bag practice I rsised above is NOT a positive law issue: it was a real world action by 2 consenting parties to indicate what type of contract they were entering into.

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  22. Lord Keynes:

    "Again, irrelevant. Banking practise, positive law, are separate from the economics."

    "(1) so actual law will not convince you."

    Exactly. No actual laws will ever be justified to me simply because they are laws. Laws can be, and overwhelmingly are, extremely immoral, violent, and unjust. Just look at the law that the President is going to sign. He's going to sign a law that says the US military has the right to assassinate American citizens without trial, lawyer, or due process. But am I supposed to be convinced it is right and just, solely because it is law? No.

    "Irrelevant. Status quo is an argumentative fallacy."

    "It isn't irrelevant: if two parties contract freely and voluntarily to do something and understand and regard the passing over of money as a callable loan and not as a bailment, the IT IS NOT FRAUD."

    I said status quo is irrelevant.

    And you keep saying "freely and voluntarily" as if you have already proved your conclusion true. You haven't. Not unless you can show the economic differences between them.

    "Fraud is "intentional deception made for personal gain or to damage another individual". It cannot be regarded as fraud in that sense."

    I tend to agree, which is why I haven't decided outright it is fraud. The economics however lend credence to the position that humans are "defrauding" economic laws in a way that is self-destructive (see economic collapses brought about by FR banking).

    Legally, I just don't know yet.

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  23. "You mean like the vast numbers of real world contracts in history where people bought and sold slaves?"

    LOL: utterly invalid comparison.

    Why? Because the slavery exchanges were NOT mutally consensual: the FR callable loan exchanges WERE free and voluntary exchanges by two parties.

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  24. "I see no reason to agree with your claim that FR accounts are loans, in the economic sense."

    And the economic sense simply means whether the FR account or callable loan constitutes "the exchange of a present good or a present service against a future good or a future service".

    And this is an argument we've already had in the last post: they ARE exchanges of present for future goods, because you

    (1) give up the ownership and possession of your money (the present good) in exchange for

    (2) the future goods that are (a) interest and/or (b) banking services, and (c) a debt instrument, your FR account.

    Since the only way to determine whether people do in fact "give up the ownership and possession of money" in these cases is to look carefully at their actual actions and practices, free exchanges, and understanding of those actions via human legal systems, it is clear that denying the relevance of free actions, actual real world contracts, practices and law is a piece of idiocy from you: you can't refute the overwhelming evidence that people DO in fact freely contract to give up ownership of their money and enter into a debt contract in the case of FR accounts and callable loans, and your only solution is absurd denial of the empirical evidence.

    Congratulations: you prove the stupidity and absurdity of a priori praxeology and libertarian cultism.

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  25. Oh, and even if you accept Mises's eccentric idea of the "autistic exchange", all you need ot do is change the following:

    -----
    "(ii) this is the holding of an asset you own. It is certainly the holding of money in the sense that it is not being (a) invested in capital goods production for a return, or (b) spent on consumer goods (and it is not even being used to buy a financial asset on a secondary market or second hand good). In contrast, banks will generally lend most of your money out in sense (a) or (b) or buy financial assets with it.

    (iii) You get nothing in an interpersonal exchange for holding your money in this way (say, either interpersonally exchanged services or goods). You also get the same money you dig up or remove from the chest in a physical sense."
    ---------

    All propositions are true, and the differences between sticking your money in a chest and lending it to a bank are clear.

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  26. Lord Keynes, it seems you're suggesting that a warehouse receipt is also a time/credit transaction, since the depositor doesn't have the good under his control anymore. Where am I wrong?

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  27. "Lord Keynes, it seems you're suggesting that a warehouse receipt is also a time/credit transaction, since the depositor doesn't have the good under his control anymore. "

    You are completely wrong.

    (1) the fractional reserve (FR) bank account or callable loan is not a warehouse receipt, and never is, because it is never a bailment/depositum.

    (2) from the beginning of the FR contract, the account is a loan/mutuum, and that is the way that parties - two people - have historically contracted and understood their exchange; this is the way it is understood in numerous European legal systems, from the Roman republic onwards (in fact, the words mutuum and depositum are Classical Latin).

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  28. Yes, I understand that, but you haven't addressed my question. I'm asking the other way around. Why a warehouse deposit is not a time/credit transaction?

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  29. Because a warehouse receipt is a certificate of bailment. In a bailment, you NEVER relinquish ownership of the thing left as a bailment: no credit/debt exchange can occur.

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