“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 [1953]: 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.
Notes
* 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.
BIBLIOGRAPHY
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 [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.
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.
Lord Keynes:
ReplyDelete"All of these claims about “future goods” apply equally to the fractional reserve bank account or bank notes as fiduciary media."
No, they don't, because money is a present good, not a future good.
Holding money is the holding of instantaneous purchasing power. It not a claim to some future purchasing power.
Lord Keynes:
ReplyDelete"Yet credit instruments with a time element such as certain bills of exchange only redeemable for cash at a certain date can be used as a “surrogate for cash,” or, that is, as a means of payment and medium of exchange."
Only if they are instantly redeemable, which means only if every single bill of exchange is fully backed by instantaneous purchasing power, i.e. money.
"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."
The insurance industry is about future claims to money that the insurance industry owns. Demand deposits are instantaneous claims to money, in the present. Money is an instantaneous, present good. You cannot compete FR to insurance like this.
Lord Keynes:
ReplyDelete"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 payments and medium of exchange is entirely up to the parties involved, and the endogenous expansion of the money supply that occurs cannot be considered fraud."
I agree that the fraud claim is wrong, if everyone agrees and understands what is happening. But if everyone does not agree and does not understand, then it is fraud. This is Hoppe's position. If everyone does agree and does understand, then what happens is that people will only end up abandoning what money is objectively (medium of exchange with absolute and unconditional property rights), in favor of something conditional and non-absolute, which is no longer money but something else.
If you really want to see a major contradiction in Rothbard about fractional reserve banking, I would advise you to look through pages 115-122 in his 'History of Money and Banking,' where he talks about the Suffolk bank system, a private fractional reserve bank, in a positive way and how it dealt with issues using the market. He even concluded by stating:
ReplyDelete"While it lasted, though, the Suffolk banking system showed that it is possible in a free-market system to have private banks competing to establish themselves as efficient, safe, and inexpensive clearinghouses limiting overissue of paper money." p. 122
"Yet credit instruments with a time element such as certain bills of exchange only redeemable for cash at 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."
ReplyDeleteIn Rothbard's framework, in order for something to be a part of the money supply, the public has to perceive it always redeemable for a fixed value (the par value of money). In reality, whenever you ask someone if they own the money in their bank (despite the fact that they "technically" do not own it), 99% of the time they will always say that they do. People "perceive" that they own (fungible bailment) what may be legally considered as "debt titles" they buy/sell goods and services with/for. The essence of what constitutes money is not variability of "liquidity", which is a huge drawback in modern economic thinking of money, but rather the definition above:Something constitutes the money supply when the public perceives it always redeemable for a fixed value (par value of money).
As Rothbard eruditely states (right after your quote)
"The operative difference, then, is not whether an asset is liquid or not (since stocks are no more part of the money supply than, say, real estate) but whether the asset is redeemable at a fixed rate, at par, in money. Credit instruments, similarly to the case of shares of stock, are sold for money on the market at fluctuating rates. The current tendency of some economists to include assets as money purely because of their liquidity must be rejected; after all, in some cases, inventories of retail goods might be as liquid as stocks or bonds, and yet surely no one would list these inventories as part of the money supply. They are other goods sold for money on the market." (p.734)
This belief (in my view) forms the basis for Rothbard's support of 100% reserves (not necessarily endorsing his legal view, however). From What Has Government Done to Our Money, p.163
"I am advocating that the law be changed to treat bank notes and deposits as what they are in economic and social fact:claims warehouse receipts to standard money--in short, that the note and the deposit holders be recognized as owners-in-law of the gold (or, under a fiat standard, of the paper) in the bank's vaults. Now treated in law as a debt, a deposit or note should be considered as evidence of a bailment."
This "economic and social fact" is the above statement: The public always perceives their demand deposits redeemable for a fixed value.
Part of Rothbard's disagreement with legal theory is that it because it generally treated bailments as claims to "specific/earmarked" goods in a bag, especially money, the courts/legal theorists viewed the money as being loaned to the bank. Rothbard's view on bailments would have bailment/deposit law be similar to current grain warehousing law, where bailments of nonspecific goods can exist.
Not necessarily endorsing his ironclad view, btw.
"The operative difference, then, is not whether an asset is liquid or not (since stocks are no more part of the money supply than, say, real estate) but whether the asset is redeemable at a fixed rate, at par, in money"
ReplyDeleteNo, the operative difference is whether the liquid asset in question IS used as a means of payment and medium of exchange: bills of exhancge frequently are, stocks are not.
"No, they don't, because money is a present good, not a future good.
ReplyDeleteHolding money is the holding of instantaneous purchasing power."
And the FR bank account or bank note is NOT the holding of "instantaneous" purchasing power: when you hold it now, you have a debt contract, and you must withdraw (get repaid) your money to spend it in the case of the FR account. When you exchange your FR bank note for goods, even here it is when you actually use it at some point in the future to get purchasing power. As I have said above:
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 payments and medium of exchange is entirely up to the parties involved, and the endogenous expansion of the money supply that occurs cannot be considered fraud.
"And the FR bank account or bank note is NOT the holding of "instantaneous" purchasing power: when you hold it now, you have a debt contract, and you must withdraw (get repaid) your money to spend it in the case of the FR account."
ReplyDeleteThat's exactly what Hoppe argues makes FR notes unsuitable as a medium of exchange. He holds medium of exchange to be instantanous purchasing power. FR notes, since they are not instantaneous, are a movement away from that nature of a medium of exchange.
Yes, this does seem like a normative pronouncement of what a medium of exchange "should be", but then again, fiat money enforced by the state is also based on a normative pronouncement.
I think Hoppe would argue that in a free market, the medium of exchange would primarily consist of instant purchasing power (money), rather than FR notes, if FR takes place that is.
"When you exchange your FR bank note for goods, even here it is when you actually use it at some point in the future to get purchasing power."
If you paid in FR bank note, then you aren't transferring instant purchasing power. But yes, you will get future potential purchasing power.
"As I have said above: 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 payments and medium of exchange is entirely up to the parties involved, and the endogenous expansion of the money supply that occurs cannot be considered fraud."
If you believe it's up to the parties involved, why aren't you using that ethic elsewhere? Why do you only use "it's up to the parties involved" when it comes to FR banking? Your worldview is inconsistent.
Your worldview is also contradictory. For if you say that FR banking contracts should be up to the parties involved, then you can't also hold the position that you want the government to curtail the amount of FR credit that could be expanded on the basis of purely voluntary agreements in the market! You have argued before that you want FR to not be abolished, just curtailed. But curtailment requires attacking what would have been up to the parties involved! You therefore are also against letting parties engage in FR contracts!
You don't make any sense. Your position is riddled with inconsistencies and contradictions.
"For if you say that FR banking contracts should be up to the parties involved,
ReplyDeleteI should have qualified that by saying, under "natural rights ethics".
then you can't also hold the position that you want the government to curtail the amount of FR credit that could be expanded on the basis of purely voluntary agreements in the market! "
Yes I can: because I subscribe to consequentialist ethics.
Lord Keynes:
ReplyDeleteYou wrote: "Yes I can: because I subscribe to consequentialist ethics."
Consequentialist ethics?
"the assignment of rights of exclusive control cannot be dependent on certain outcomes. One could never act and propose anything unless private property rights existed prior to a later outcome. A consequentialist ethic is a praxeological absurdity. Any ethic must instead be “aprioristic” or instantaneous in order to make it possible that one can act here and now and propose this or that rather than having to suspend acting until later. Nobody advocating a wait-for-the-outcome ethic would be around to say anything if he took his own advice seriously. Also, to the extent that utilitarian proponents are still around, they demonstrate through their actions that their consequentialist doctrine is and must be regarded as false." - Hoppe, "The Economics and Ethics of Private Property." - pg 344.
You simply cannot base your support for certain government policies whose outcome is in many cases months, sometimes even a year or more later, on consequentilist ethics. For how will you even know what you ought to do and what you ought not to do, NOW, and until the outcome is had in the future? Humans cannot predict the future, especially in the sphere of human choices and actions.
Time passes whether you want it to or not. You must make choices. You must act in the meantime. What should I do and what I should not do, in between the present time and the future times of the outcomes of my actions, if you as a consequentialist were asked on what I should do and what I should not do? You would have no answer for me. You'd be unable to tell me because the future must come to be before you can even make a judgment in your worldview.
Attempting to practise consequentialist ethics would mean that for the time period in between now, and the outcomes, which could be hours, days, weeks, months or even years later, consequentialist ethics can't say anything about what we ought to do and what we ought not do.
If I were to go around doing whatever I want, and I said to you that my actions are directed towards achieving a desired outcome 1 year later, then you as a consequentialist must wait 1 year before you can judge whether my actions in the meantime are justified or not. But that would mean you could not tell me whether my actions in the meantime, during the meantime, are in fact ethically justified or not.
Consequentialist ethics is an absolute absurdity, and I cannot believe you would adhere to it, considering how much you whine about natural rights ethics. At least natural rights ethicists can tell us what we ought to do here and now. Sure, we can disagree with them, sure we could point out some of their errors, but at least they don't adhere to an absolutely absurd doctrine like the one you're preaching.
"Any ethic must instead be “aprioristic” or instantaneous in order to make it possible that one can act here and now and propose this or that rather than having to suspend acting until later. Nobody advocating a wait-for-the-outcome ethic would be around to say anything if he took his own advice seriously"
ReplyDeleteRubbish: you do not have to "wait-for-the-outcome". You use your best judgement now. For many potential actions, the future outcomes CAN be predicted:
(1) If I am pulled over by a policeman and asked to take a breath test, if I refuse, then it is a civil offense for the first conviction.
(2) if I eat dinner at a restaurant and refuse to pay the bill, the owner wil probably call the police.
Pulling some idiotic quote out of Hoppe does not refute consequentilist ethics.
"Humans cannot predict the future, especially in the sphere of human choices and actions."
Yeah, utter garbage: fit for an idiot only.
I make the prediction that the majority of human beings will continue eating tomorrow. I have just made a prediction and you can bet it will turn out to be true.
"Any ethic must instead be “aprioristic” or instantaneous in order to make it possible that one can act here and now and propose this or that rather than having to suspend acting until later. Nobody advocating a wait-for-the-outcome ethic would be around to say anything if he took his own advice seriously"
ReplyDeleteI see a man drowning in pool, crying for help: I can save him at no serious risk to myself.
It takes but seconds (if even that) to foresee that saving him is the right thing to do by consequentialist ethics.
"No, the operative difference is whether the liquid asset in question IS used as a means of payment and medium of exchange: bills of exhancge frequently are, stocks are not."
ReplyDeleteYes, and in order for something to be a means of payment and a general medium of exchange the public perceives it as always redeemable for a fixed sum of money, something that many things that are "liquid" are not. Regardless of the legality of FRB, which I'm not necessarily disputing, people always perceive bills of exchange as money substitutes. For something to be apart of the money supply it needs to be considered a money substitute, nothing more, and nothing less.
"Regardless of the legality of FRB, which I'm not necessarily disputing, people always perceive bills of exchange as money substitutes."
ReplyDeleteThat is incorrect. Whether or nor a particular bill of exchange is accepted or not depends on the reputation of the drawer. Whether it will be accepted by a party at all depends on the trust people have in the drawer.
"That is incorrect. Whether or nor a particular bill of exchange is accepted or not depends on the reputation of the drawer. Whether it will be accepted by a party at all depends on the trust people have in the drawer. "
ReplyDeleteAnd for it to circulate as a general medium of exchange, everyone needs to perceive it as redeemable for cash. The checks and debit cards of banks today are not warehouse receipts legally but "bills of exchange". But their general acceptance is so widespread that the public treats them as warehouse receipts.