Sunday, December 11, 2011

Hoppe on Fractional Reserve Banking: A Critique

In Hans-Hermann Hoppe, The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy (Boston and London, 1993), 205–254 (see also 175–204), we have various arguments against fractional reserve banking.

(1) In Hoppe (1993: 210ff.), we have the same tired and ignorant argument offered by other opponents of fractional reserve banking: that fiduciary media and fractional reserve banking involve exclusive ownership of one and the same thing at the same time. In fact, this is Hoppe’s central argument and it is plainly false.

Hoppe asserts that the issue and acceptance of a fiduciary note cannot signify the transfer of property from bank to client or vice versa (Hoppe 1993: 210). But Hoppe’s assertion that fiduciary media are “property titles” is utterly wrong. The private bank note or other fiduciary note is not a title to property left as a bailment (or depositum). Some of the earliest British goldsmith notes, forerunners of later private bank notes (or fiduciary media), were clearly negotiable credit/debt instruments payable on demand, with the statement “I promise to repay upon demand ...” demonstrating that these were IOUs or debt records, not certificates of bailment (Selgin 2011: 11; see Melton 1978 for examples of these goldsmith notes).

IOUs are acknowledgements of a debt owed, and negotiable instruments are the most important form of IOU in modern capitalism. They include (1) promissory notes and (2) bills of exchange. Promissory notes (or notes payable or simply notes) are a specific promise to pay, which are often negotiable debt instruments.

The bill of exchange (or sight or time draft) usually involves three parties, the drawer, the drawee and the payee. When the drawee (usually a bank) has agreed to provide credit to the drawer than the bill of exchange becomes a debt instrument used as a means of payment.

But even in a bill of exchange the drawer and drawee might be the same person and his promise to pay accepted by the payee on trust. In cases where the drawer/drawee has yet to obtain the money he will later use to honour his bill of exchange, we have a mere promise to pay, accepted as a fiduciary media and used as a means of payment.

If a bill of exchange is negotiable, then it may be transferred as a means of payment by the payee and used to obtain payment of the specified amount by the new holder (this is signified by adding the words “or order” after the name of the payee). Thus the bill of exchange is treated and used as money in the sense of being a means of payment and a medium of exchange. The same is true of negotiable promissory notes:
“the most usual form of a negotiable promissory note in England is: ‘£60 (or other sum). London, 1st Jany. 1860 (or other place or date). Two months after date (or on demand, or any other specified time), I promise to pay to Mr. A. B. or order fifty pounds, value received. (Signed) C. D.’ A more common form in America is: ‘New York, Jany. 1st, 1860. Value received, I promise to pay A. B. or order one thousand dollars in two months. C. D.’ But no especial form is necessary. The essential things are, a distinct promise, and sufficient certainty as to the payee, the payer, the amount, and the time of payment. And we must remember that the one purpose of all these certainties is to make the note, as far as the law can make it so, the absolute equivalent of money. As to the certainty of the payee, he may be either the original payee, or one who is made a payee by the indorsement of an original payee or of an indorsee; for every indorsee may become an indorser.” (Riply and Dana 1861: 167).
In principle, a negotiable bill of exchange or promissory note may pass from the original payee to a second, third and fourth party, and be used as a widely-accepted means of payment and medium of exchange in the community, and acting just like money. The private fractional reserve bank note functions in the same way, and the issue of bank money (or credit money), the negotiable bill of exchange and promissory note have all constituted the major manner in which an endogenous system of credit money is able to expand the money supply of a nation:
“About the end of the Sixteenth Century, the merchants of Amsterdam, Middleburgh, Hamburgh, and some other places, began to use instruments of credit among themselves, and as they came into personal contact, these documents naturally assumed the form of an acknowledgement of the debt by the debtor, with a promise to pay it to bearer on demand, at the time fixed. These documents were called bills obligatory, or of debt, or of credit, and were transferable by indorsement in all respects like Bills of Exchange.

These documents are now called Promissory Notes, and an English writer in the time of Charles I., Gerard Malynes, strongly advocated their introduction into England, but he saw that the Common Law prohibited it. They first began to be used by the goldsmiths, who, as shewn afterwards, originated the modern system of banking in England soon after 1640. They were then called goldsmiths' notes, but they were not recognised by law. The first promissory notes recognised by law were those of the Bank of England in 1694, which were, technically, bills obligatory, or of credit. By the Act founding the Bank, their notes were declared to be assignable by indorsement (Act, Statute 1694, c. 20, s. 29). But this did not extend to other promissory notes. In 1701 and 1703 it was decided that promissory notes were not assignable, or indorsable over, within the custom of merchants. In consequence of these decisions, the Act, Statute 1704, c. 8, was passed, by which it was enacted that promissory notes in writing, made and signed by any person or persons, body politic or corporate, or by the servant or agent of any corporation, banker, goldsmith, merchant, or trader, promising to pay any other person, any sum of money, should be assignable and indorsable over in the same manner as inland bills of exchange.

These promissory notes, of all sorts, including Bank of England notes, as well as the notes of private bankers and merchants, were all placed exactly on the same footing as inland bills of exchange, that is, they were all made transferable by indorsement on each separate transfer.


In the case however of bank notes (by which, in law, is always meant Bank of England notes), as these were always payable on demand, and the payment was quite secure, the practice of indorsement soon fell into disuse, and they passed from hand to hand like money. In the case of private bankers of great name, the indorsement was often omitted. But, though the ceremony of indorsement was often dispensed with as superfluous, it must be observed that in no way altered the character of the instrument, and the receiver of the note took it entirely at his own peril, and ran exactly the same risks as if he took any other instrument of credit without indorsement.” (Macleod 1866: 87–88; on the historical aspects of promissory notes and bill of exchanges, see Macleod 1866: 84–87).
In an historical sense, private bank notes (fiduciary media) were just like private promissory notes and bills of exchange: European legal systems have understood these as credit instruments, and they were not considered as mere property titles (that is, a receipt for a bailment). Fiduciary media are records of debt and the promise to repay a debt on demand or at a specified date: people can freely and voluntarily accept a debt instrument as a means of payment and medium of exchange, and the exchange involved is in no way fraud. We can see above that it was free contract and the business practices of the private sector that originated them.

If the practice of using negotiable promissory notes and bill of exchanges as money is acceptable, then there is no reason why private fractional reserve bank notes or credit money should be regarded as fraudulent or immoral, for they are in the same moral, legal and ontological category as these other debt instruments.

(2) With the collapse of Hoppe’s absurd claim that fiduciary media are “property titles, ” we are left with his gross ignorance and misunderstanding of the legal nature of the fractional reserve transactions account/checking account. This is sometimes misleadingly called the “demand deposit,” but such an account is not what is known as a depositum or bailment in legal terms. The fractional reserve transactions account is nothing but a debt instrument on the bank’s books (or these days on the bank’s computer system). There is never any initial “bailment” involved, contrary to Hoppe (1993: 218–219).

When the modern fractional reserve bank takes money for a new account, this is actually a personal loan to the bank, which is why the bank can pay interest for it. The money in the deposit becomes the property of the bank. The money is a loan, or legally a mutuum, which means “a contract under which a thing is lent which is to be consumed and therefore is to be returned in kind” (the modern sense of the English word “deposit” is thus misleading when it refers to money in fractional reserve banking). The depositor who lends the money gets a credit (or IOU) from the bank and a promise to pay interest: “the very essence of banking is to receive money as a [m]utuum” (MacLeod 1902: 318). The money has been “sold” to the bank as a mutuum and is to be returned in genere (“in general form”), which means you do not necessarily get the same money back, but just an equivalent amount. In fractional reserve transactions account, you have lost your property rights to the money when you lent it to the bank, and instead have entered into a contract with the bank to allow them to own and use your money, even though they are obliged to return to you on demand the debt they owe to the same amount, in whole or in part, from money from their other reserves, money from the sale of financial assets and their own other loans.

Appendix

There is relevant historical evidnce on the legal development of banknotes in a legal treatise by John A. Russell and David Maclachlan called Chitty on Bills of Exchange, Promissory Notes, Cheques on Bankers, Bankers' Cash Notes and Bank Notes (London, 1859):
Bankers’ cash notes, which formerly circulated in the metropolis as goldsmiths’ notes, at a time when the only banking transactions in England were entirely in the hands of the goldsmiths, are in effect promissory notes. It appears from Lord Holt’s judgment in the case of Buller v. Crips, that these notes were introduced by the goldsmiths, about thirty years previously to the reign of Queen Anne, and were generally esteemed by the merchants as negotiable. But Lord Holt as strenuously opposed their negotiability as he did that of common promissory notes; and they were not generally settled to be negotiable until the statute of Anne was passed, which relates to these as well as to common promissory notes. They appear originally to have been given by bankers to their customers, as acknowledgments of money received for their use; and they may be, and generally are, payable to bearer. At present, cash notes are seldom issued except by country bankers, their use having been superseded by the introduction of cheques. When formerly issued by London bankers, they were sometimes called shop notes.” (Russell and Maclachlan 1859: 351-352).
In regarding bank notes and goldsmiths’ notes as promissory notes, we have explicit evidence here about how they were considered debt instruments, not certificates of bailment (or “property titles,” titles to property held as a bailment).

On the statute of Queen Anne (reigned 1702-1714), or the Act, Statute 1704, c. 8, see Melton (1986: 110-111).

BIBLIOGRAPHY

Hoppe, Hans-Hermann, 1993. The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, Kluwer Academic Publishers, Boston and London.

Macleod, H. D. 1866. The Theory and Practice of Banking (2nd edn.), Longmans, Green, Reader, and Dyer, London.

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

Melton, Frank T. 1978. “Goldsmiths’ Notes, 1654–1655,” Journal of the Society of Archivists 6.1: 30–31.

Melton, Frank T. 1986. Sir Robert Clayton and the Origins of English Deposit Banking, 1658-1685, Cambridge University Press, Cambridge.

Redlich, F. 1970. “The Promissory Note as a Financial and Business Instrument in the Anglo-Saxon World: A Historical Sketch,” Revue Internationale d’Histoire de la Banque 3: 271-297.

Riply, G. and C. A. Dana (eds). 1861. “Negotiable Paper,” in The New American Cyclopaedia: A Popular Dictionary of General Knowledge, Vol. XII. Mozambique-Parr. D. Appleton and Company, New York. 165–170.

Rogers, J. S. 2004. The Early History of the Law of Bills and Notes: A Study of the Origins of Anglo-American Commercial Law, Cambridge University Press, Cambridge.

Russell J. A. and D. Maclachlan. 1859. Chitty on Bills of Exchange, Promissory Notes, Cheques on Bankers, Bankers’ Cash Notes and Bank Notes: With References to the Law of Scotland, France, and America (10th edn.), Henry W. Sweet, London.

Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709

19 comments:

  1. Lord Keynes:

    "Hoppe asserts that the issue and acceptance of a fiduciary note cannot signify the transfer of property from bank to client or vice versa (Hoppe 1993: 210). But Hoppe’s assertion that fiduciary media are “property titles” is utterly wrong."

    Fiduciary media are not "property titles"? They are debt claims? If they are debt claims, then that means the ownership of the money property must have been transferred from client to bank, right? But then if the bank owns the money, then that means the third person who was granted a checking account by the bank does not own money either, but another debt claim.

    If it's another debt claim, then the logical consequence of this is that what bank clients come to trade in the market to settle trades is no longer even money, but debt claims to various banks. And if anyone wanted to actually take possession of money, they would have to exercise a "call option" on their debt claims, and take possession of the money which "backs" their debt claims.

    According to Hoppe, this would mean that the fiduciary notes that are used to settle trades in the market would no longer even be money but a form of lottery tickets. But Hoppe argues that the function of money is to:

    "...act as the most easily resaleable and most widely accepted good, so as to prepare its owner for instant purchases of directly or indirectly serviceable consumer or producer goods at not yet known future dates; hence, whatever may serve as money so as to be instantly resalable at any future point in time, it must be something that bestows an absolute and unconditional property right on its owner."

    "In sharp contrast, the owner of a note to which an option clause is attached does not possess an unconditional property title. Rather, similar to the holder of a "fractional reserve parking ticket" (where more tickets are sold than there are parking places on hand, and lots are allocated according to a "first-come-first-served" rule), he is merely entitled to participate in the drawing of certain prizes, consisting of ownership or time-rental services to specified goods according to specified rules. But as drawing rights — and not unconditional ownership titles — they only possess temporally conditional value until the time of the drawing, and they become worthless as soon as the prizes have been allocated to the ticket holders; thus, they would be uniquely unsuited to serve as a medium of exchange." - pg 201-202.

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  2. Lord Keynes:


    When you say:

    "When the modern fractional reserve bank takes money for a new account, this is actually a personal loan to the bank, which is why the bank can pay interest for it. The money in the deposit becomes the property of the bank. The money is a loan, or legally a mutuum, which means “a contract under which a thing is lent which is to be consumed and therefore is to be returned in kind” (the modern sense of the English word “deposit” is thus misleading when it refers to money in fractional reserve banking)."

    I consider you to be contradicting the implications of considering all demand deposits as loans to banks, and not property titles to money deposited at banks. For if banks take ownership of the money, and all the clients get in return are debt claims, then how can you even say that clients are depositing MONEY into banks? Since what clients own are debt claims, and not money, which the banks own, wouldn't the clients necessarily be depositing debt claims?

    For example, if I have a checking account at BofA, and you call that a debt claim and not my money property or my property title to money, and I transferred that debt claim to your bank because I am buying something from you, say a bad economics lesson, than how can you even say that I deposited money at your bank? You can't!

    And no, you cannot say that by me transferring the debt claim from my bank to your bank, the debt claim is first being exchanged into money, given to me, after which it becomes my property, whereby I then give the ownership rights to you, after which you then deposit that money into your bank, you then get another debt claim in return. For the debt claim is what is functioning as the means of payment between you and I, not the money. The means of payment, the money, is being transferred from ownership of one bank to another bank.

    What happens in reality is that bank B is granting you as client B a new fiduciary promise to pay, and bank A reduces its promise to pay me by whatever sum of money is backing the debt claim transfer, and then bank B calls on bank A for the money to be directly transferred to bank B. The clients aren't owners of money in these steps if they only own debt claims. So you can't say that clients are depositing money into banks. You could only say that they are depositing debt claims into banks. The only entities who withdrew and deposited money would be the banks, not the clients.

    By saying that clients are depositing money into banks, you would be contradicting your earlier position that clients own debt claims instead of money. But only if they owned money, could you say that they are depositing money.

    The only conceivable way that a client could deposit money into a bank is by remitting their lottery tickets to their bank, taking possession of money, and then going into another bank and redepositing that money. But cash transactions such as this represents only a minute portion of all transactions. The rest of what is deposited into banks and what is transacted would have to be considered debt claims, right?

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  3. Lord Keynes:

    How will you reconcile the above facts with your position that banks receive money from their clients, instead of what is almost always the case, which is that banks are receiving debt claims from clients? If banks are overwhelmingly receiving debt claims from clients, and not money, then by saying clients deposit money into banks, wouldn't you be misrepresenting those property titles to be something that they are not? Or are you only referring to instances of money withdrawals and money deposits specifically? If the latter, then what you would be saying is that most of what circulates as medium of exchange in the economy would not be absolute and unconditional property rights of the owners (the bank clients), but conditional property rights instead (conditional on the bank's ability to pay).

    The key argument Hoppe is making here is that this would contradict the objective nature of a medium of exchange (money). Medium of exchange is, according to Hoppe, a transfer of unconditional and absolute property rights, not conditional and non-absolute property rights.

    Sure, people can voluntarily contract in ways that deny objectivity, but those contracts cannot be considered legitimate in my view, for such contracts cannot even be enforced objectively. For let's suppose that 1000 bank clients call upon their banks to exchange their debt claims for money. If the calls exceed the amount of money the bank has, then how can these contracts be enforced objectively? If the bank receives 1 million calls for, say, $1 billion, but the bank has only $1 million on hand, then how can these contracts be enforced objectively? In my view they cannot. In my view it would be arbitrary on which clients can exchange their debt claims for money and which clients cannot.

    Maybe first come first served is an objective standard, but then what happens if those first in line, have bank accounts that exceed the banks' money? Then first come first served is impossible. Or what if the bank "tips off" some of their more "valued" clients, and it becomes a game of the bank and some of its clients gaining an advantage over the lesser "valued" clients? Is this an objective basis for settling such debt claims? I'm not sure, but I don't think so.

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  4. Lord Keynes:


    I don't think it matters whether we label fiduciary media as property titles to money, or debt claims. Whatever is circulating, is overwhelmingly not money because it's not absolute and unconditional, and to me, that contradicts the very nature of medium of exchange.

    My personal position is that I am not sure whether to regard voluntary contracts that have no absolute, objective foundation (such as would be the case in a free market 100% reserve gold standard, assuming of course that the people in the free market are knowledgeable in a way such that they enforce 100% reserve through non-governmental institutions of protection and enforcement, which is possible and cannot be ruled out, regardless of what past people in history might have done), to be legitimate and not fraudulent.

    I mean, would you consider a contract between two people that says one shall pay the other 3 unicorns in one year's time, to be legitimate and not fraud? I don't think I would consider it legitimate. It would be voluntary for sure, but it couldn't be enforced.

    So I think "fraud" is too harsh a word to describe FR banking. Maybe anti-objective and unenforceable. I mean, it cannot be denied that it is possible, IN PRINCIPLE, for everyone to be willing to engage in the practise. But I am not as eager about it as you are, because unlike you, I am not eager about the government taking more control over the banking system derived from one's ideology in favor of such a thing. You most likely want the banks to engage in the practise, so that the banks remain brittle and shaky, which then gives you an excuse to advocate for more government control, which is clearly your only purpose of running this blog, whether you are consciously aware of this or not.

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  5. "If it's another debt claim, then the logical consequence of this is that what bank clients come to trade in the market to settle trades is no longer even money, but debt claims to various banks."

    That's Hoppe just begging the question: it is none of his business what people wish to accept as a means of payment.

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  6. "And no, you cannot say that by me transferring the debt claim from my bank to your bank, the debt claim is first being exchanged into money, given to me, after which it becomes my property, whereby I then give the ownership rights to you, after which you then deposit that money into your bank, you then get another debt claim in return. For the debt claim is what is functioning as the means of payment between you and I, not the money. "

    You're simply confusing transfer of, say, a private FR banknote (which is a debt claim) with repayment of the debt and transfer of ownership of money repaid to someone else.

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  7. "The key argument Hoppe is making here is that this would contradict the objective nature of a medium of exchange (money). Medium of exchange is, according to Hoppe, a transfer of unconditional and absolute property rights, not conditional and non-absolute property rights."

    That nothing but Hoppe's invalid and false definition of the "medium of exchange" role of money. Free exchange in the community involves purchasing of goods by debt/credit. He's wrong.

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  8. "I mean, would you consider a contract between two people that says one shall pay the other 3 unicorns in one year's time, to be legitimate and not fraud?"

    That is an invalid and unsound analogy: you're saying that a debt instrument like the FR bank note is in the same ontological category as the unicorn. False. No one has ever seen or held a real unicron.

    Debt instruments like the FR bank note have been seen and used for centuries.

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  9. "I mean, would you consider a contract between two people that says one shall pay the other 3 unicorns in one year's time, to be legitimate and not fraud?"

    That is an invalid and unsound analogy: you're saying that a debt instrument like the FR bank note is in the same ontological category as the unicorn. False. No one has ever seen or held a real unicron.

    Yet debt instruments like the FR bank note have been seen and used for centuries, and FR banks have operated in the real world FR accounts and notes for centuries.

    See Gene Callahan's here:

    "A rather bizarre argument against fractional reserve banking, which I ran into this morning yet again, runs as follows: If I make a contract to sell you a square circle, that contract cannot be enforced, because it is self-contradictory. (Is the contract really self-contradictory?) Well, fractional reserve banking is the same! The fact that people may voluntarily put their money in fractional reserve banks means no more for their legitimacy than does the fact that someone might have agreed to take delivery of a bunch a square circles.

    Well, if this analogy worked, what it would prove is that fractional reserve banking can't possibly exist. Contracts for square circles are illegitimate because square circles are impossible. By analogy, contracting into a fractional reserve relationship must be illegitimate because fractional reserve bank notes cannot exist.

    Oddly enough, these non-existent entities are also the cause of the business cycle!"


    http://gene-callahan.blogspot.com/2011/10/hey-i-just-withdrew-some-colorless-red.html

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  10. "For let's suppose that 1000 bank clients call upon their banks to exchange their debt claims for money. If the calls exceed the amount of money the bank has, then how can these contracts be enforced objectively?"

    Then that is a bank unable to honour all its contracts: breach of ocntrcat has occurred. Just like an insurance company unable to honour all its clients policies if they all had claims at the same time: this does not mean the insurance industry is fraud, however.

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  11. ""For let's suppose that 1000 bank clients call upon their banks to exchange their debt claims for money. If the calls exceed the amount of money the bank has, then how can these contracts be enforced objectively?""

    "Then that is a bank unable to honour all its contracts: breach of ocntrcat has occurred."

    Yes, but my question was how can these contracts be enforced objectively? If a breach of contract has occurred, then who among the parties involved is liable, how are they liable, what are they liable for, and how will their liability be enforced?

    "Just like an insurance company unable to honour all its clients policies if they all had claims at the same time: this does not mean the insurance industry is fraud, however."

    But insurance claims are claims to future money, not instant money as in demand deposits. You can't compare them because they are different in the temporal sense.

    But let's forget about whether FR is fraud or not for a moment, because it's a different topic to the one I am asking about. I am asking how will the FR contracts be enforced objectively, meaning, who has the legitimate right to do what to whom, if the contracts are breached? What are the consequences of contract breaching? What are the banks liable for, and how will their liabilities be enforced, and why should they even be enforced, if the assumption is that all the parties agreed to the FR contracts, and understood that they might not get the money back?

    How can you even call a bank's failure to pay a "breach of contract"? If the banks and the clients agreed via contract that the clients are getting a debt claim in return, then that means the bank WOULDN'T be breaching the contract upon failure to pay, because failure to pay is engrained in all debt contracts. They are credit instruments. They are based on the credit worthiness of the borrower.

    You keep contradicting yourself. You claim FR should be up to the parties involved. That contradicts your other claim that FR should be curtailed by the state, which means it should NOT be up the parties involved, but up to the state instead. Then you say that FR, because it is agreed upon by all parties, means that clients must have accepted the risk of not being paid. But then you also claim that a bank's failure to pay is a "breach of contract", which means the banks didn't sign debt contracts, but bailment-like contracts.

    Can you please pick a consistent story and stick with it? The way you make your case makes it impossible to have a proper discussion. For I have no idea what position you are taking such that I can agree or disagree. I mean, should I take you to be against "letting" the parties involved determining FR, or should I take you to be in favor of it? Should I take you to be treating FR contracts as debt claims, in which case failure to pay is not a breach of contract, but a possible outcome of the risks involved, or should I take you to be treating FR contracts to be like bailments, in which failure to pay would be a breach of contract?

    You're like a chameleon, ever shifting your position in order to defend state control.

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  12. "But insurance claims are claims to future money, not instant money as in demand deposits. "

    (1) you're just repeating the completely wrong interpretation of FR banking as a bailment/depositum

    (2) The FR bank account also gives you access to future money: when you make a "withdrawal", this is really just calling back the money you are owed.

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  13. "I am asking how will the FR contracts be enforced objectively, meaning, who has the legitimate right to do what to whom, if the contracts are breached? "

    Perhaps you should look at the real world??

    (1) in our system, depositors are protected by deposit insurance: the FDIC deals with insolvent banks: allowing deposits to be guaranteed by the government, the banks are then liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.

    (2) in previous systems what happens depends on the bankruptcy law of the relevant country. E.g., the bank is declared bankrupt, its assets sold off, and whatever is left goes to depositers or bondholders.

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  14. "You claim FR should be up to the parties involved. That contradicts your other claim that FR should be curtailed by the state, which means it should NOT be up the parties involved, but up to the state instead."

    The question of why state intervention and regulation of a FR banking system is justified is a separate issue and not what I am discussing here.

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  15. "How can you even call a bank's failure to pay a "breach of contract"? If the banks and the clients agreed via contract that the clients are getting a debt claim in return, then that means the bank WOULDN'T be breaching the contract upon failure to pay, because failure to pay is engrained in all debt contracts."

    Oh really:

    "Debt
    The defining feature of a debt contract is that default by the borrower, a breach of the contract, gives the lender ..."


    http://books.google.com.au/books?id=cGqmeynpZ48C&pg=PA135&dq=debt+default+%22breach+of+contract%22&hl=en&ei=29flTvyqNLCviQeMmei2BQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CE4Q6AEwAQ#v=onepage&q=debt%20default%20%22breach%20of%20contract%22&f=false

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  16. Lord Keynes:

    "But insurance claims are claims to future money, not instant money as in demand deposits."

    "(1) you're just repeating the completely wrong interpretation of FR banking as a bailment/depositum"

    Wrong. Demand deposits are contracts whereby the client has instantaneous rights to withdraw money ON DEMAND, i.e. at any time they desire. There is no minimum time period that must elapse in demand deposits.

    This has nothing to do with labeling demand deposits as a bailment versus debt claim.

    "(2) The FR bank account also gives you access to future money: when you make a "withdrawal", this is really just calling back the money you are owed."

    No, wrong again. The bank is giving you PRESENT, instantaneous access to money. Yes, the instantaneousness is continuous, which means that you can withdraw it now, a moment from now, or any time in the future. But this does not mean that the contract is a future oriented contract the way insurance contracts are future oriented. You are not entitled to instantaneous withdrawals of money in insurance contracts. Certain future events must first take place before you are entitled to insurance money.

    With demand deposits, you are granted instantaneous drawing rights in the present.

    "I am asking how will the FR contracts be enforced objectively, meaning, who has the legitimate right to do what to whom, if the contracts are breached? "

    "Perhaps you should look at the real world??"

    I was asking you, according to your ethics.

    "(1) in our system, depositors are protected by deposit insurance: the FDIC deals with insolvent banks: allowing deposits to be guaranteed by the government, the banks are then liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders."

    Guaranteed by the government? What ethical norm underlies the claim that clients of bank A ought to be taxed, at gunpoint, of their earnings, to pay for the clients of bankrupt bank B? If you say that FR contracts are legitimate, because they are agreements between voluntary parties, namely banks and their clients, then why the hell are uninvolved parties entering the picture, being held liable for the errors made by a bank and their own clients?

    How can one possibly claim that FR is justified on the basis that it's between a bank and their clients, but then claim it's justified for OTHERS to be forcefully deprived of their money? If FR is not fraud, why the hell are innocent people being screwed over in order to keep it going?

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  17. "Demand deposits are contracts whereby the client has instantaneous rights to withdraw money ON DEMAND, i.e. at any time they desire. There is no minimum time period that must elapse in demand deposits."

    They have rights to demand money as repayment of the debt.

    "If FR is not fraud, why the hell are innocent people being screwed over in order to keep it going?"

    Innocent people are not being sc**wed over - they have their savings and security protected by FDIC. Why don't you ask people whether or not they welcome having their FR account protetced by the FDIC instead of losing everything.

    This is your "hate government" libertarian nonsense.

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  18. "They have rights to demand money as repayment of the debt."

    Since your claim is that FRNs are debt, themselves, where is the "repayment"? How can you repay debt with additional debt?

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  19. "Since your claim is that FRNs are debt, themselves, where is the "repayment"? How can you repay debt with additional debt?"

    A FR account/debt is not repaid with the bank's own debt: debts will be cleared with the higher money of account (base money).

    A FR account/debt, when called back, is repaid with a tantundem, money of the same value/quantity: in a commodity money world it might be gold, or a gold-backed note, or a banknote issued by a central bank, which ultimately can be converted into gold.

    In a fiat money world, you get base money: cash or reserves. Now you might say that ultimately that is a higher debt/obligation of the central bank, but nevertheless it is still the final means of payment, by which final settlement and clearing of debt is made in the economy.

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