“Chapter 2 described the difference between ‘claims to present goods’ and ‘claims to future goods.’ The same analysis applies to money as to barter. A claim to future money is a bill of exchange—an evidence of a credit transaction. The holder of the bill—the creditor—redeems it at the date of redemption in exchange for money paid by the debtor. A claim to present money, however, is a completely different good. It is not the evidence of an uncompleted transaction, an exchange of a present for a future good, as is the bill; it is a simple evidence of ownership of a present good. It is not uncompleted, or an exchange on the time market. Therefore, to present this evidence for redemption is not the completion of a transaction or equivalent to a creditor’s calling his loan; it is a simple repossessing of a man’s own good.” (Rothbard 2004: 800).Here we have explicit evidence that even Rothbard understood the bill of exchange as a credit instrument, and the relationship of the drawer to payee is specified as the relationship of a debtor to creditor. But, typically, Rothbard, with contemptible incompetence characteristic of much of his work, was unable to correctly identify the fractional reserve demand deposit or fractional reserve bank note as just such a thing: a credit/debt instrument, and the relationship of the fractional reserve bank to its client/depositor being a relationship of the debtor to creditor as well.
Hoppe makes the same error. He incorrectly regards the fractional reserve account or fractional reserve bank note as a property title or claim to present money.
Curiously, on pp. 252–254 of The Economics and Ethics of Private Property (1993), Hoppe, using the notion of present versus future goods, is adamant that instances where market transactions involve ownership of future goods are legitimate, such as
(1) the owner of an airline ticket has ownership of a future good (Hoppe 1993: 252);All of these claims about “future goods” apply equally to the fractional reserve bank account or bank notes as fiduciary media. They are debt contracts and record the contract whereby the bank will pay a future good: the money that will be repaid as a debt owed either at a specified date or on demand.
(2) the owner of a fractional reserve parking lot, where there are more tickets owned by clients than actual parking spaces provided, is not guilty of fraud because his ticket holders own a future good: the right to search for a parking spot at a future date (Hoppe 1993: 253);
(3) the owner of an insurance policy is the owner of a future good (Hoppe 1993: 253–254; however, here Hoppe equivocates and makes a serious blunder in not admitting that an insurance company that fails to honour all of its policies at a particular time is not necessarily committing fraud at all: just breach of contract, just as a fractional reserve bank would be committing breach of contract if it failed to honour all its accounts/debts, not necessarily fraud [see Horwitz 2000: 224]*).
In this sense, Rothbard’s understanding of the bill of exchange applies to the fractional reserve bank account or bank note, despite the Austrian denials of this (Mises 2009 : 268; Huerta de Soto 2006: 14-15; Rothbard 2011: 733-734; cf. Rozeff 2010: 507-509). One of Rothbard’s arguments against including fractional reserve accounts as credit instruments is as follows:
“On the other hand, a genuine time deposit—a bank deposit that would indeed only be redeemable at a certain point of time in the future, would merit very different treatment. Such a time deposit, not being redeemable on demand, would instead be a credit instrument rather than a form of warehouse receipt. It would be the result of a credit transaction rather than a warehouse claim on cash; it would therefore not function in the market as a surrogate for cash.” (Rothbard 2011: 733-734)Yet credit instruments with a time element such as certain bills of exchange only redeemable for cash at or after a certain date can be used as a “surrogate for cash,” or, that is, as a means of payment and medium of exchange. Rothbard is laughably wrong.
The bank note or fractional reserve bank account are evidence of an uncompleted transaction, a credit/debt transaction, an exchange of a present good (money lent) for a future good (money to be repaid, often with interest). That the money can be repaid on demand (which reduces the debt) does not change the fact that you have also renounced the use of the money you lent (as in a time deposit). When you are repaid, you receive a tantundem, not the same money held as a bailment (or as a depositum), but merely money of the same value/quantity, from the banks’ reserves, sale of financial assets or lending from other banks.
Whether fiduciary media that are debt instruments – including credit money, private bank notes or bills of exchange – are accepted in the community as a means of payment and medium of exchange without direct conversion to money (but merely as the transfer of debt owed) is entirely up to the parties involved, and the endogenous expansion of the money supply that occurs cannot be considered fraud.
* It should be noted that virtually all business investment and insurance industries could be regarded as inherently unstable, like fractional reserve banking, because the future is uncertain. Yet the insurance industry – just like fractional reserve banking – can be operated profitably over long periods and is stable. When some unforeseen event happens like a massive natural disaster, the insurance companies could be overwhelmed by claims and collapse, because they cannot pay. If all or a very large number of the policy-holders of an insurance company suddenly needed insurance payments over a brief period, the company might not be able to honour all its claims or find a credit line to allow it to do so. This, however, is not fraud, but breach of contract, a civil law offence. And this is not an even remotely serious argument against insurance, because all business activity involves risk and uncertainty, and both clients of a business and the business itself can never escape uncertainty and the possibility that the business’s contracts might not be honoured.
Hoppe, Hans-Hermann, 1993. The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, Kluwer Academic Publishers, Boston and London.
Horwitz, S. 2000. Microfoundations and Macroeconomics: An Austrian Perspective, Routledge, London and New York.
Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala
Juurikkala, O. 2002. “The 1866 False-Money Debate in the Journal des Economistes: Déjà Vu for Austrians?,” The Quarterly Journal of Austrian Economics 5: 43-55.
Mises, L. von, 2009 . 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.
Rothbard, M. N. 2009. Man, Economy, and State: A Treatise on Economic Principles (2nd edn.), Ludwig von Mises Institute, Auburn, Ala.
Rothbard, M. N. 2011. Economic Controversies, Ludwig von Mises Institute, Auburn, Ala.