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Thursday, September 29, 2011

If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?

That is the question never properly answered by opponents of fractional reserve banking (FRB), and a blatant logical contradiction in their anti-FRB position.

The Rothbardians might argue as follows: an institution taking money from its clients and contractually obliged to return to them exactly what they are rightly entitled to is fraudulent when such an institution could never honour all the clients’ claims at one time, if all or even a large number required some or all of the money they are entitled to. If so, they have destroyed the basis of the insurance industry, as has been pointed out by Gene Callahan here (“The ‘Immorality’ of Fractional Reserve Banking Revisited,” May 23, 2009).

The argument that FRB is fraudulent merely because there are certain possible circumstances when the bank cannot fulfil its promise to pay all its clients on demand is utterly unconvincing.

First, virtually all business investment and insurance industries could be regarded as inherently unstable, like FRB, because the future is uncertain. But the insurance industry – just like FRB – 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. But that 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.

In the same way, FRB might be stable over long periods. But, when some unforeseen event happens (a collapse in export demand, rumours about some bank, a change in subjective business expectations), the FRB bank might be overwhelmed by a bank run and collapse, because it cannot pay. The issue is whether it can meet demand from its depositors out of reserves, sale of financial assets and loans from other banks, without a liquidity crisis. Many FR banks are perfectly capable of doing that in a crisis, while others are not. That some banks cannot honour all their claims under certain unusual circumstances is not a serious moral argument against FRB. If it were, then all insurance industries would be unacceptable on moral grounds as well.

The anti-FRB libertarians will no doubt then fall back on the argument that insurance is not fraudulent because when you pay premiums that money becomes the property of the insurance company, and is not money retained as your property, whereas in FRB you do retain ownership of your demand deposit money. But that shows the most contemptible ignorance of the nature of FRB.

If you put your money into a mere holding warehouse, then the owners or managers of the warehouse have no property rights with respect to your money stored there (such money is legally known as a depositum, which means “something given or entrusted to another for safe-keeping”). The identical deposit must be returned to the owner or, in legal terms, it must be returned in specie (“in its own form”).

But, when a modern fractional reserve bank takes money for a new deposit, 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 with interest. In demand deposits, you have lost your absolute 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 use it, even though they are obliged to return to you on demand money to the same amount in whole or in part from their other reserves, other unused deposits, sale of financial assets or lending from other banks (MacLeod 1902: 324). This can also be expressed in this way:
“General deposits are obligations of the bank to pay money. They may be payable on demand or at a stated time in the future. The great bulk of commercial bank deposits are payable on demand. They create between the bank and the customer the relation of debtor and creditor, the title to the deposit passing to the bank, while the depositor acquires a right to receive a stated sum of money” (Johnson 1911: 117).
It is certainly true that many members of the public may be ignorant of these facts above. Yet if you have failed to read your fractional reserve bank contract, whose fault is that? As a client, you ought to understand the contract that you sign. The solution to the problem of modern people not understanding the nature of fractional reserve banking is simply legislation to make banks explicitly explain to potential customers how FRB works. Specifying to clients that the property rights to the money had passed to the bank and in return an IOU or credit had been granted to the depositor, that the bank lends your money out, and that it will return not the same money but other money from its reserves will solve the moral problem of clients not understanding the nature of FRB. Under these circumstances, FRB is not fraud. It is a free contract.

The Rothbardians like to tout themselves as the most pure, heroic defenders of free markets. They are not. The anti-FRB Rothbardians are coercive, anti-freedom violators of private liberty and free contract in their opposition to FRB.


Appendix 1: Fractional Reserve Banking under Roman Law

I’ll quickly deal with the status of FRB in ancient Rome here, because when discussing the subject you frequently find anti-FRB libertarians invoking the work of Huerta de Soto (2006), and arguing that FRB was illegal or considered immoral at Rome.

In fact, Roman law appears to have allowed FRB under the mutuum contract, a real contract under which a fungible good like money was lent to a bank and ownership of the money passed to the bank. The bank was required to return an equivalent amount of money, after a certain time or on demand.

In Roman law, there were a number of types of real contract (contracts re), as follows:
(1) mutuum (loan for consumption);
(2) commodatum (loan for use);
(3) pignus (pledge), and
(4) depositum or depositum regulare (bailment for safe keeping).
In Roman law, there was also a type of contract called the depositum irregulare which, when involving money, allowed the transferral of ownership (dominium) of the money. Because money can be regarded as representing a certain value, what is deposited is a quantity of a thing (quantitas) and not an individual thing itself (corpus). The depositor thus receives back the same quantity (tantundem) of money, not the same money itself (Zimmermann 1990: 215–216).

In the time of the Roman jurists Ulpian/Gnaeus Domitius Annius Ulpianus (c. 170–223 AD) and Papinian/Aemilius Papinianus (142–212 AD), however, it appears that the depositum irregulare was merely considered to be a type of mutuum, and it may well be that the whole legal concept of depositum irregulare is a development of later legal theorists, unknown to jurists of the second or third century AD (Oudshoorn 2007: 135–136; cf. Adams 1962; for the specialist literature, see Seidl 1951; Geiger 1961; Litewski 1974; and Gordon 1982). Therefore the mutuum was the legal framework and concept under which fractional reserve banking was conducted in ancient Rome (Zimmermann 1990: 218). Whether the mutuum was a time deposit or a demand deposit depended on the type of contract between the two parties, and there is no reason to think that fractional reserve banking was held as either immoral or illegal (for how Roman law influenced Medieval law on banking, see Dotson 2004: 89–92).

The evidence for the existence of FRB in the Roman Republic and Roman Empire is overwhelming (Harris 2006: 11; Harris 2011: 236). There is not one shred of evidence that it was regarded as immoral or prosecuted as a crime.

But let us suppose, for the sake of argument, that in fact the Romans did regard FRB as immoral. Even if correct, that would be a red herring and an informal fallacy called the appeal to tradition/argumentum ad antiquitatem, irrelevant to the question whether in the modern world FRB is immoral and fraudulent. The Romans, for example, had sumptuary laws to prohibit the consumption of certain luxury goods, supposedly to stop the spread of immoral luxury and preventing the moral and physical health of Romans from degenerating. Is that a remotely convincing argument by itself for prohibiting consumption of certain luxury goods today? Not in the least.

BIBLIOGRAPHY

Adams, B. 1962. “Haben die Römer depositum irregulare und Darlehen unterschieden,” Studia et documenta historiae et iuris 28: 360–371.

Dotson, John E. 2004. “Banks and Banking,” in C. Kleinhenz (ed.), Medieval Italy: An Encyclopedia. Vol. 1, A to K, Routledge, London. 89–92.

Geiger K. 1961. Das depositum irregulare als Kreditgeschäft, Freiburg.

Gordon W. M. 1982. “Observations on depositum irregulare, III,” in Studi in onore di Arnaldo Biscardi (vol. 3), Ed. Cisalpino-La Goliardica, Milan. 363–372.

Harris, W. V. 2006. “A Revisionist View of Roman Money,” Journal of Roman Studies 96: 1–24.

Harris, W. V. 2011. Rome’s Imperial Economy. Twelve Essays, Oxford University Press, Oxford.

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

Johnson, J. F. 1911. Banking Principles, Alexander Hamilton Institute, New York.

Litewski W. 1974. “Le dépôt irrégulier,” Revue internationale des droits de l’Antiquité 21: 215–262.

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

Seidl, E. 1951. “Der Eigentumsübergang beim Darlehen und Depositum irregular,” in Festschrift für F. Schulz, Böhlau, Weimar. 373–379.

Selgin, G. 2000. “Should We Let Banks Create Money?” Independent Review 5.1: 93–100.

Selgin, G. A., and White L. H. 1996. “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics 9.2: 83–107.

Oudshoorn, J. G. 2007. The Relationship Between Roman and Local Law in the Babatha and Salome Komaise Archives: General Analysis and Three Case Studies on Law of Succession, Guardianship and Marriage, Brill, Leiden and Boston.

Zimmermann, R. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition, Juta & Co, Cape Town.

110 comments:

  1. I don't see how it can be fraud as it doesn't even require two people to own the same property at the same time. And even if it did, that's not necessarily fraud anyway, such as joint ownership. The claims that they money might not be there can also apply to insurance as well. You're not guaranteed with insurance as anybody who has filed a claim can attest to.

    Calling FRB a fraud is just like saying the govt had no role in the early computers, when in fact it was about 80% in the first generation, 50% in the 80s.

    (By the way, I have responded to a Libertarians comment that "...The basic arpanet packet switching technology was discovered by a private party..." here:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/did-hayek-advocate-public-works-in.html

    I strongly recommend people here read my comments (found near the end as of this moment).

    By the end of the few comments you will agree wholeheartedly that computers and the Internet were developed in the public sector. [1] And packet switching was aimed at creating distributed computing systems because the airforce created a network of radar systems called "Sage." It is not surprising that someone who worked at RAND, which was started by the airforce called project RAND, developed something for the airforce in case of a nuclear attack. Furthermore, of course, TCP/IP is not an insignificant factor and it is what keeps the internet running to this day.

    Capitalists ultimately take what other people have invented, try and copyright them in someway or claim them under patents or contracts, then continue to make a profit off them without competition. Or in another case, businessmen receive government funded research that is often handed over to the private tyrannies for free.

    None of this is very fair to the programmers and scientists who did the original work, like in the case of Unix. Capitalists are dirty little thieves, most of whom have never done a days work.

    Again, it should be noted that this is another "dispute" by Libertarians who want to troll and not provide facts.

    [1]First Generation (hardware and software, assembly language)
    Second Generation (transistors)
    Third generation(OS, IC, Chips) time sharing
    Fourth generaiton (1970s, personal computers, microprocessors, etc.)
    Fifth Generation(parallel computing)
    )

    --successfulbuild

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  2. LK - apologies to be off topic but have you done LK - apologies to be off topic but have you done a post setting out the key counter-arguments to the New Keynesian programme, eg as set out by DeLong below?

    http://www.j-bradford-delong.net/Econ_Articles/monetarism.html

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  3. 1/2

    The error in LK's "analysis" is that he is failing to comprehend the concept of property rights, and the nature of a demand deposit contract as opposed to an insurance contract.

    An insurance contract with an insurance company is more akin to a loan to the bank, not a demand deposit with a bank.

    The fact that with a fractional reserve bank, should everyone seek to withdraw their money all at once, it would lead to bankruptcy and failure to make good on demand deposits, is not the actual basis for the argument that FRB is fraud. It is a red herring, a smokescreen.

    Yes, while it is true that should everyone attempt to withdraw their money at the same time from an FRB bank, it would bankrupt the bank and the bank would fail to make good on their promise pay. But that event is only the consequential manifestation of the fraud that has already taken place beforehand.

    Consider. Suppose that you and I agree that I will keep your car safe and secure in my garage for summer while you go to Auburn, Alabama to learn economics. We also agree that should you want to take possession of your car, say to let one of your family members use it, I will immediately make available the car to them.

    Suppose that one week after your departure, I decide to let my friend take your car out for the weekend. So he drives away with it on Friday night, telling me he'll bring the car back on Sunday night.

    Saturday night comes along, and I get a phone call from your brother/sister/whatever, saying that they are coming over to pick up the car because they want to use it. He/she arrives, and I am caught. I tell them I don't have the car. They call you up, and you're rightfully upset.

    Clearly I violated the terms of our agreement. The key question here is WHEN did the contract get violated? Was it when I gave your car to my friend, or was the contract violated once your brother/sister found out about it?

    I trust that you will understand that the violation occurred when I gave my friend your car, not when your brother/sister found out about it.

    Or, if you don't like that example, here's another. Remember in "V for Vendetta", when V was going around injecting people with a lethal poison? In the scene with the female doctor (can't remember her name) he says "I killed you ten minutes ago." Did V commit a crime when she stops breathing, or did he commit a crime when he injected her with the poison?

    The principle here is that crimes are crimes not when they are discovered, but when they are committed. Action, not finding out about the action, is what determines the time a crime takes place.

    cont'd

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  4. 2/2

    Back to FRB now, FRB fraud takes place not when there is a bank run, but when the bank creates more than one property title for the same property, i.e. more than one property claim to the same sum of money.

    When you deposit money into a bank in a demand deposit, a single property title is created for a given sum of money, namely, the property ownership is retained by you in your name. The bank is but a holder, a steward, a trustee of your property. A demand deposit contract is one in which the bank promises to keep YOUR money, or more generally, the tandendum, safe and available at all times. That of course means that they cannot grant ownership title of that same money to someone else. Of course since money in fungible, the exact same dollars you deposit do not have to be made available to you, but the same amount of dollars certainly do.

    By letting third parties take possession of their client's property, through risky loans, the bank is violating the contract with that individual client as soon as they do that, NOT when the client learns about it through a bank run, just like I violated my contract with you when I gave your car to my friend, NOT when you happened to have learned about it.

    ALL of LK's justifications for FRB above have already been advanced literally hundreds of years ago, and already refuted. They are untenable.

    I'll go through LK's post in more detail next, because there are a number of whoppers that are screaming for correction.

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  5. "The fact that with a fractional reserve bank, should everyone seek to withdraw their money all at once, it would lead to bankruptcy and failure to make good on demand deposits, is not the actual basis for the argument that FRB is fraud. It is a red herring, a smokescreen."

    Then we have established that you can't make that argument!

    "Suppose that you and I agree that I will keep your car safe and secure in my garage for summer while you go to Auburn, Alabama to learn economics. We also agree that should you want to take possession of your car, say to let one of your family members use it, I will immediately make available the car to them. .... Saturday night comes along, and I get a phone call from your brother/sister/whatever, ... I tell them I don't have the car. They call you up, and you're rightfully upset. Clearly I violated the terms of our agreement"

    Correct. Except your example is invalid, misleading and irrelevant. Here's why:

    In fractional reserve banking the agreement is to return money of equal value - not the same money. Therefore your whole example is pointless: the agreement would have to be:

    I leave my car with you now, but I willing to accept, or allow my relative/friend etc. to use, a different car of similar quality/value, not the same car. For example, I might accept your car or your wife's, which happens to be the same quality/value as my original car.

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  6. The Rothbardians might argue as follows: an institution taking money from its clients and contractually obliged to return to them exactly what they are rightly entitled to is fraudulent when such an institution could never honour all the clients’ claims at one time, if all or even a large number required some or all of the money they are entitled to. If so, they have destroyed the basis of the insurance industry, as has been pointed out by Gene Callahan here (“The ‘Immorality’ of Fractional Reserve Banking Revisited,” May 23, 2009).

    An insurance contract is more akin to a loan to a bank, not a demand deposit at a bank. This is because with an insurance contract, the money becomes the property of the insurance company, much like a bank becomes the owner of loan money.

    It is the property titles that are important. The massive confusion you and so many other pro-FRB advocates suffer from when you seek to justify it is a consequence of an inability to understand property rights theory, which is why you people tend to be apologetic to the state, which is society's systematic violator of property rights.

    It was always a wonder to me why so many left-wing "anti-corporation" type folks who are the loudest champions of controlling businesses and what they do, should seem to be so unlike themselves when they consider fractional reserve banking. For all of a sudden, they start to become very antagonistic towards criticizing corporations, and become so very suspicious of anti-FRB advocates. In some cases, for instance LK's contradictory position, they even start to try and use property rights arguments to defend FRB. They will welcome property rights violations from the government in virtually all walks of life, from taxing people and violating their property rights to pay for wars and welfare, to forcing restaurant owners to ban smoking at their establishments. In these cases, property rights be damned, and we have to hear about social contracts, majority rule, consequentialist ethics, and all other excuses.

    But don't you dare try to stop corporations from engaging in FRB!

    Then I realized why they suffer from this Dr. Jekyll and Mr. Hyde routine. It's for two main reasons. One, they don't understand the concept of property rights. That is the necessary condition. Two, and probably more importantly, they regard the creation of money outside the sphere of private property as positive to their political and ideological interests of welfare and/or warfare.

    With inflation, they believe that they can receive more prosperity. With the government letting banks fraudulently inflating the money supply, it means the government can tax more, and it means interest rates will be (temporarily) lower as well, which means more poor people can acquire more cheaper money which they otherwise could not receive.

    To these folks then, FRB is viewed as a sort of gold piss stream from an otherwise evil corporate beast. Yes, control the beast and cage the beast, but if it's going to piss gold, then don't stop that! It's our RIGHT to take that piss, because of the pain and suffering we put up with, which would only be even worse if money were "tighter" and "more scarce" and "more expensive."

    cont'd...

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  7. The argument that FRB is fraudulent merely because there are certain possible circumstances when the bank cannot fulfil its promise to pay all its clients on demand is utterly unconvincing.

    Very true. But that is not the fundamental basis for the argument that FRB is fraud. That is a manifestation of prior fraud, just like your realization that your car is not in my garage is not when I committed the fraud, but when the fraud is "made public."

    First, virtually all business investment and insurance industries could be regarded as inherent instable, like FRB, because the future is uncertain. But the insurance industry – just like FRB – 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. But that 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.

    Insurance companies that have clients who just so happened to demand claims at the same time, which then bankrupts the insurance company, is not a manifestation of fraud. It is a manifestation of bad economic planning, or just bad luck. The money the insurance company possesses is THEIR OWN PROPERTY. It's not the property of their insurance clients. Their clients own a right to seek payment from the company when certain contracted events transpire. The difference is subtle, but crucial. It is this difference in property ownership that confuses pro-FRB advocates into believing that banks take ownership the money they receive in demand deposits. There is a huge difference between ownership and possession.

    The fact that the insurance company will go bankrupt should all their clients seek claims is only a superficial similarity to FRB banks failing to make good on their contracts with demand deposit clients.

    The effects are the same, but the causes are different. Different causes can have the same effect. FRB banks fail to pay because they committed property fraud. Insurance companies fail to pay because they committed bad forecasting. Forecasting is contained in both FRB banking and insurance, but only the FRB banks are committing fraud.

    cont'd

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  8. A run on the bank occurs not when someone see an "out of order" message on the ATM's screen but when the capital of the bank becomes subject to doubt.

    The idea of "fractional reserve" is rooted in a compete failure to understand the ALM business of banking. Reserves are related not to the fraction of deposits, but to the capital of the bank. The function of capital is to cover for any potential losses and therefore the economically corresponding asset to the liability called "equity" is the asset with the lowest risk on the assets side of the bank. This is obviously reserves (i.e. cash) and government bonds.

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  9. "FRB banks fail to pay because they committed property fraud."

    They committed no "fraud".

    You lost your property rights to the money given to the bank as a mutuum/loan.

    They contracted to give you money up to the same value/quantity on demand from their other reserves, money from asset sales, or loans from other banks.

    No fraud is involved.

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  10. Pete,

    If you've ever actually read a "demand deposit" contract from a modern bank, the fine print clearly states that you are paying that money to the bank, in exchange for the bank paying you out of its money pool in the future. They explicitly reserve the right to refuse to pay you under many circumstances. So, it isn't even joint ownership, it's the bank's money, and you have a special type of option on it.

    Not only that, but nearly everyone knows that those deposits are only insured to $100,000 per account. Which means that banks have explicitly stated that any money over that amount may simply vanish.

    If you don't like that, you are free to not use banking. That's your choice. If you've signed that contract though, you have agreed to those terms; and no matter how obtuse or how fine the print, by your own ethical principles you are not only strictly bound to it, but you have indicated it as your preference.

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  11. "When you deposit money into a bank in a demand deposit, a single property title is created for a given sum of money, namely, the property ownership is retained by you in your name. The bank is but a holder, a steward, a trustee of your property. A demand deposit contract is one in which the bank promises to keep YOUR money, or more generally, the tandendum, safe and available at all times. That of course means that they cannot grant ownership title of that same money to someone else."

    (1) You do not retain ownership of the original money in a demand deposit: you lose it. The money has been given 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 with interest. In demand deposits, you have lost your absolute property rights to the money when you lent it to the bank.

    (2) It is spelled tantundem.

    (3) You don't even understand the meaning of tantundem. The tantundem is merely money of the same value/quantity returned to you, not the same money, which you lost and gave up any ownership of when you gave it to the bank.

    The depositor receives back the same quantity (tantundem) of money, not the same money itself (Zimmermann 1990: 215–216).

    In the language of legal Latin, the bank merely has a contract to return money of equal value/quantity: that is, "to restore the equivalent" (restituere tantundem).

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  12. Capitalists ultimately take what other people have invented, try and copyright them in some way or claim them under patents or contracts, then continue to make a profit off them without competition.

    To be fair, Austrians don't accept intellectual property as a valid concept. So, they don't use copyright, patents, or trademarks, they use plain old market tyranny.

    You're mainly right, though. A few threads back I challenged Pete to name a single major scientific discovery that was funded entirely with private money, and all I got were crickets.

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  13. In the same way, FRB might be stable over long periods. But, when some unforeseen event happens (a collapse in export demand, rumours about some bank, a change in subjective business expectations), the FRB bank might be overwhelmed by a bank run and collapse, because it cannot pay. The issue is whether it can meet demand from its depositors out of reserves, sale of financial assets and loans from other banks, without a liquidity crisis.

    There would be no "liquidity crisis" if banks kept their demand deposit client's money safe and available AT ALL times, and not just some of the time, or when individual clients happen to want to withdraw their money.

    The issue is the FRB fraud and how to deal with that, not how to deal with the destructive consequences of the fraud.

    Many FR banks are perfectly capable of doing that in a crisis, while others are not. That some banks cannot honour all their claims is not a serious moral argument against FRB. If it were, then all insurance industries would be unacceptable on moral grounds as well.

    The fraud arises when there are more property titles than there is property.

    The anti-FRB libertarians will no doubt then fall back on the argument that insurance is not fraudulent because when you pay premiums that money becomes the property of the insurance company, and is not money retained as your property, whereas in FRB you do retain ownership of your demand deposit money. But that shows the most contemptible ignorance of the nature of FRB.

    If you put your money into a mere holding warehouse, then the owners or managers of the warehouse have no property rights with respect to your money stored there (such money is legally known as a “depositum,” which means “something given or entrusted to another for safe-keeping”). The identical deposit must be returned to the owner or, in legal terms, it must be returned in specie (“in its own form”).

    But, when a modern fractional reserve bank takes money for a new deposit, this is actually a personal loan to the bank, which is why the bank pays interest for it. The money in the deposit becomes the property of the bank.

    And there we have the non sequitur that a demand deposit becomes the property of the bank, instead of the truth, which is that property ownership is retained by the client. The confusion between loans and demand deposits is universal amongst pro-FRB fraud advocates.

    The justification LK makes for the claim that a demand deposit is a loan is "that's why they pay interest on it." No LK, the reason why banks pay interest on demand deposits is to trick people like you into believing it is a loan when in reality it is a demand deposit. They pay something like 0.005% annual interest on demand deposits. Even on a $1 million demand deposit, it amounts to very little, enough the banks can afford because they're making 5% on loaning out demand depositor's money.

    If banks didn't pay interest on demand deposits, clients would still deposit money into banks in demand deposits, and the banks know this. The banks also know that should they pay zero interest on such deposits, it will assist in the client knowing that the money is the client's money as a demand deposit, because the sum doesn't change. With a rigid sum, it facilitates in the understanding that the money is the client's, not the banks. With interest, it gives the appearance that the money is the banks, and that the client is making a loan. They pay inconsequential "interest" on such deposits for propaganda purposes, not because the money is a loan.

    Now, this is not to say that bankers today are all aware of this fraud, or that they are all purposefully trying to confuse their clients. Today, it is more likely that banks pay interest on demand deposits as a sort of tradition, a convention from past practices, during times when bankers WERE aware of it and consciously paid interest on demand deposits to hoodwink their clients and the state.

    cont'd

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  14. 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 with interest. In demand deposits, you have lost your absolute 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 use it, even though they are obliged to return to you on demand money to the same amount in whole or in part from their other reserves, other unused deposits, sale of financial assets or lending from other banks (MacLeod 1902: 324). This can also be expressed in this way:

    “General deposits are obligations of the bank to pay money. They may be payable on demand or at a stated time in the future. The great bulk of commercial bank deposits are payable on demand. They create between the bank and the customer the relation of debtor and creditor, the title to the deposit passing to the bank, while the depositor acquires a right to receive a stated sum of money” (Johnson 1911: 117).

    Both Johnson and Macleod are profoundly ignorant and highly confused about the difference between demand deposit accounts and loan accounts. They, like you, keep arbitrarily insisting the myth that demand deposits are loans, when they are not loans. The property ownership for demand deposit money is retained by the client, not the bank. Only with loans are property titles transferred from client to bank.

    Mere physical possession, or paying a fixed percentage of the sum to the client, does not turn a client's property into the bank's property.

    As I said, all the justifications for FRB utterly fail.

    ReplyDelete
  15. "And there we have the non sequitur that a demand deposit becomes the property of the bank, instead of the truth, which is that property ownership is retained by the client. "

    The demand deposit is acontract that gives the bank ownership of the money, and a promise to return other money up to the amount given.

    ReplyDelete
  16. It is certainly true that many members of the public may be ignorant of these facts above. Yet if you have failed to read your fractional reserve bank contract, whose fault is that? As a client, you ought to understand the contract that you sign. The solution to the problem of modern people not understanding the nature of fractional reserve banking is simply legislation to make banks explicitly explain to potential customers how FRB works. Specifying to clients that the property rights to the money had passed to the bank and in return an IOU or credit had been granted to the depositor, that the bank lends your money out, and that it will return not the same money but other money from its reserves will solve the moral problem of clients not understanding the nature of FRB. Under these circumstances, FRB is not fraud. It is a free contract.

    This is another tactic of pro-FRB fraud advocates. Blaming the victims. Here, pro-FRB fraud advocates display some semblance of recognition in that individuals can be financially wiped out when all they did was want to keep their money safe and secure, and not given to third parties in risky loans. After all, if they really did want to loan their money, why not a traditional loan? Why the run-around of wanting to loan money to a bank and yet ask that they be able to withdraw their money at any time as well? LK expects us to believe that if clients' demand deposit money is wiped out due to FRB banks going kaputz, then the client "should have read the contract." Oh if only LK knew what a demand deposit contract actually entails, he would have known that it does not include taking on loan risk. If only he was aware that in a recent poll, over 70% of UK residents actually believe that their banks had the money on hand safe and available at all times. For such clear and explicit contracts, banks sure are doing a piss poor job being upfront about what they are doing with their client's money. FRB fraud REQUIRES ignorance on the part of the public. That's the only way it can work. If those 70% knew that their banks loaned their money out, the UK banking system would no doubt collapse due to bank runs.

    But screw those 70% during a bank panic, huh? They should have known. Morons.

    Governments around the world are close to criminalizing the act of people publicly calling for bank runs. After all, governments get in on the gravy train too. They need banks to sell their debt to. If the banks couldn't give out more money than they could get in loans, then the governments would have to tax the people more, and that's far more difficult. Inflation tax is something few understand. Direct taxation pretty much everyone understands.

    The Rothbardians like to tout themselves as the most pure, heroic defenders of free markets. They are not. The anti-FRB Rothbardians are coercive, anti-freedom violators of private liberty and free contract in their opposition to FRB.

    Wow, for someone who constantly advocates for violations of private property rights in other walks of life, you sure sound like an anarcho-capitalist on that one. Or were you being facetious? Well, if you yourself advocate for coercive violations of private property, which you have admitted you advocate in a prior post, remember?, then why are you getting all up in arms at the thought that others are (in your mind) calling for violations of private property rights? Why are you so unwilling to hear the justification for it, and why are you pretending that it has to do with protecting private property rights?

    If you were an actual advocate of protecting private property rights, you could not be a supporter of democracy. LOL, you refute yourself. See how the deeper you go into your own world, the more contradictions come to light?

    Even when you criticize anarcho-capitalists you sound like an anarcho-capitalist.

    ReplyDelete
  17. "The fact that with a fractional reserve bank, should everyone seek to withdraw their money all at once, it would lead to bankruptcy and failure to make good on demand deposits, is not the actual basis for the argument that FRB is fraud. It is a red herring, a smokescreen."

    Then we have established that you can't make that argument!

    Yes but then your whole post becomes just one giant red herring, which ignores the actual justification for why FRB is fraud!

    "Suppose that you and I agree that I will keep your car safe and secure in my garage for summer while you go to Auburn, Alabama to learn economics. We also agree that should you want to take possession of your car, say to let one of your family members use it, I will immediately make available the car to them. .... Saturday night comes along, and I get a phone call from your brother/sister/whatever, ... I tell them I don't have the car. They call you up, and you're rightfully upset. Clearly I violated the terms of our agreement"

    Correct. Except your example is invalid, misleading and irrelevant. Here's why:

    You ignored the purpose of my example. It wasn't an analogy. It wasn't to equate a car, which is a specific good, with money, which is a fungible good.

    The purpose of that example was to explode the myth that FRB fraud only becomes fraud at the point at which people LEARN and DISCOVER it, through a bank run or whatever.

    It was to show that fraud is committed at the point of action, not at the point of discovery by the victim.

    You totally missed the purpose of that example.

    ReplyDelete
  18. "FRB banks fail to pay because they committed property fraud."

    They committed no "fraud".

    That's the question under discussion. Merely claiming it's not fraud is no argument. I could just as easily say:

    They committed fraud.

    You have to do much better than this.

    You lost your property rights to the money given to the bank as a mutuum/loan.

    No, the property rights are retained by the client. They are NOT transferred to the bank. Only through loans are property rights transferred. By your logic, ALL deposits of money to banks are loans, even if they are demand deposits and not loans.

    They contracted to give you money up to the same value/quantity on demand from their other reserves, money from asset sales, or loans from other banks.

    No, they contracted with the bank to have the bank keep their money safe and available at all times. Not to give to other people through risky loans.

    No fraud is involved.

    Yes, there is fraud. Any time there are more property titles (to money) than there is property (money), there is fraud.

    ReplyDelete
  19. "It was to show that fraud is committed at the point of action, not at the point of discovery by the victim."

    And it also pointless, because there is no fraud involved making a contract for a FR banking account. You lost your absolute property rights to the money you gave to the bank. They have the ownership rights to it. They just promise to pay you back money up to the same value.

    ReplyDelete
  20. "Why the run-around of wanting to loan money to a bank and yet ask that they be able to withdraw their money at any time as well? "

    Because as any idiot knows, a mutuum contract without a fixed time period is much more convenient and flexible than a time deposit.

    That is why the free market invented fractional reserve banking.

    It overcomes the difficulty of needing liquidity at short notice for businesses and individuals that have their money locked up in time deposits.

    ReplyDelete
  21. "When you deposit money into a bank in a demand deposit, a single property title is created for a given sum of money, namely, the property ownership is retained by you in your name. The bank is but a holder, a steward, a trustee of your property. A demand deposit contract is one in which the bank promises to keep YOUR money, or more generally, the tandendum, safe and available at all times. That of course means that they cannot grant ownership title of that same money to someone else."

    (1) You do not retain ownership of the original money in a demand deposit: you lose it. The money has been given 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 with interest. In demand deposits, you have lost your absolute property rights to the money when you lent it to the bank.

    False. With a demand deposit, ownership IS retained by the client. It's the client's property, not the bank's property.

    (2) It is spelled tantundem.

    Yes, I misspelled it.

    (3) You don't even understand the meaning of tantundem. The tantundem is merely money of the same value/quantity returned to you, not the same money

    That's what I said. When I said "or, more generally" I was trying to convey that, to distinguish it from the actual money that was deposited.

    which you lost and gave up any ownership of when you gave it to the bank.

    No, the ownership of a demand deposit contract is retained by the client, not transferred to the bank.

    You keep saying the same thing over and over, but it's false. Your confusion is that you don't know the difference between a loan and a demand deposit. They are different accounts, different contracts.

    The depositor receives back the same quantity (tantundem) of money, not the same money itself

    Banks fail to keep safe and available the tantundem at all times. Each client is an individual. Banks make promises to each individual client.

    In the language of legal Latin, the bank merely has a contract to return money of equal value/quantity: that is, "to restore the equivalent" (restituere tantundem).

    It's not to "restore" it. It's to KEEP IT AT ALL TIMES.

    ReplyDelete
  22. "And there we have the non sequitur that a demand deposit becomes the property of the bank, instead of the truth, which is that property ownership is retained by the client."

    The demand deposit is acontract that gives the bank ownership of the money, and a promise to return other money up to the amount given.

    False. A LOAN is a deposit contract that gives banks ownership of the money. A demand deposit contract that retains ownership to the client.

    ReplyDelete
  23. "By your logic, ALL deposits of money to banks are loans, even if they are demand deposits and not loans"

    Is a "demand loan" a deposit? Yes it is because that is exactly how people pay with credit cards. So a demand loan is a deposit and a demand deposit is a loan. Any financial asset has a corresponding financial liability. And any deposit is an asset and a liability at the same time. How you call it depends from which side you look at it.

    ReplyDelete
  24. "It was to show that fraud is committed at the point of action, not at the point of discovery by the victim."

    And it also pointless, because there is no fraud involved making a contract for a FR banking account.

    You continue to miss the point of the example. It was to show that fraud is not committed when there is discovery of it, it is when it is originally acted on.

    This example is critical to your story and to my story, because you want to believe that the position of anti-FRB advocates is that fraud takes place at the time of discovery, during bank runs. My story is that you are wrong to claim that the position of anti-FRB advocates is that it is fraud based upon bank runs leading to failures to make good on contracts.

    Again, the fraud takes place BEFORE bank runs and failures to pay. Bank runs and failures to pay are merely an economic after-effect of the contractual fraud that has already taken place.

    You lost your absolute property rights to the money you gave to the bank. They have the ownership rights to it. They just promise to pay you back money up to the same value.

    False. Demand deposit contracts consist of ownership being retained by the client, not the bank. Only through a loan to the bank do ownership rights get transferred.

    ReplyDelete
  25. "Why the run-around of wanting to loan money to a bank and yet ask that they be able to withdraw their money at any time as well?"

    Because as any idiot knows, a mutuum contract without a fixed time period is much more convenient and flexible than a time deposit.

    Then why not a demand deposit?

    That is why the free market invented fractional reserve banking.

    The free market process did not invent fractional reserve banking any more than the free market process did not invent government paid mercenaries to "legally" murder people.

    It overcomes the difficulty of needing liquidity at short notice for businesses and individuals that have their money locked up in time deposits.

    Why not a demand deposit and not a loan then?

    ReplyDelete
  26. "No, the ownership of a demand deposit contract is retained by the client, not transferred to the bank."

    I see. No doubt demand deposit contracts that specify that the bank now has ownership of the money are just some inventions or figments of people's imagination, huh?!!

    No doubt the fact that through human history demand deposits entail contracts saying exactly that ownership of the money has pased to the bank, with a mere promise to pay money of an equivalent amount, muts also be an invention?

    Just like Huerta de Soto you have no idea what you're talking about:

    Huerta de Soto's insistence on a "fixed term" implies that loans with prepayment options (where the borrower has an option to terminate the loan early) or call options (where the lender has an option to terminate the loan early) cannot exist. Prepayment options are standard on home mortgage loans and student loans. The common checking account is (at least to all appearances) a type of callable loan where the lender is the account-holder and the borrower is the bank. The claim that such loans cannot exist was not a slip of the pen. Huerta de Soto later declares (pp. 17-18) that "it is impossible to imagine a monetary loan contract without a fixed term". Loan contracts with prepayment or call options are apparently unknown to his imagination, or for some reason do not qualify as loan contracts.

    http://www.lostsoulblog.com/2009/12/prof-lawrence-h-white-responds-to-jesus.html

    ReplyDelete
  27. "The free market process did not invent fractional reserve banking ... "

    I see. Show me the empirical evidence that governments invented FRB.

    ReplyDelete
  28. "No, the ownership of a demand deposit contract is retained by the client, not transferred to the bank."

    I see. No doubt demand deposit contracts that specify that the bank now has ownership of the money are just some inventions or figments of people's imagination, huh?!!

    No, for deposits where ownership is transferred to the bank, that is either a loan or a gift.

    No doubt the fact that through human history demand deposits entail contracts saying exactly that ownership of the money has pased to the bank, with a mere promise to pay money of an equivalent amount, muts also be an invention?

    No, throughout history LOAN contracts have stipulated that ownership rights are transferred to the bank, not demand deposit contracts.

    Just like Huerta de Soto you have no idea what you're talking about:

    "Just like"? YOU have no idea what you are talking about.

    Huerta de Soto's insistence on a "fixed term" implies that loans with prepayment options (where the borrower has an option to terminate the loan early) or call options (where the lender has an option to terminate the loan early) cannot exist.

    False. Loans with a fixed maturity end date, that have a call option or prepayment option are not impossible in an argument where loans must have "fixed terms." A loan with a call option or prepayment option are still loans with fixed terms. De Soto never said that fixed term loans cannot be liquidated, prepaid, or called upon, or changed in any other way.

    Prepayment options are standard on home mortgage loans and student loans. The common checking account is (at least to all appearances) a type of callable loan where the lender is the account-holder and the borrower is the bank.

    "At least to all appearances" a loan. Bingo.

    The claim that such loans cannot exist was not a slip of the pen.

    De Soto never declared that such loans cannot exist.

    Huerta de Soto later declares (pp. 17-18) that "it is impossible to imagine a monetary loan contract without a fixed term".

    That's true. A loan without an underlying time period is impossible to conceive. Only a demand deposit contract can no time period be conceived.

    A loan with no time period is really a gift.

    A loan with a call or prepay option is a loan with a fixed end date maturity, with some flexibility to change it according to either the lender or borrower's request. That doesn't mean that the loan doesn't have an end date, a time period, a "fixed term", associated with it.

    What is the end date for a demand deposit "loan"? All loans have an underlying time period where it must be paid back. What is the time period implicit in a demand deposit?

    Loan contracts with prepayment or call options are apparently unknown to his imagination, or for some reason do not qualify as loan contracts.

    You're making that up.

    ReplyDelete
  29. A LOAN is a deposit contract that gives banks ownership of the money.

    And a demand deposit is a mutuum, a loan.

    Your ridiculous position expresed above in other places entails that all freely made callable loan contracts are somehow "immoral" or "fraudulent".

    A demand deposit is essentially, as White says, "a type of callable loan where the lender is the account-holder and the borrower is the bank."

    ReplyDelete
  30. "The free market process did not invent fractional reserve banking ..."

    I see. Show me the empirical evidence that governments invented FRB.

    The market is not a group of people, or a place. The market is a process.

    For actions, it's not a choice between whether "the market" invented it, or whether "the government" invented it. FRB is really an action. It is a coercive action. The first person to misappropriate someone else's money that was entrusted with them for safe keeping and made available at all times? Probably some ancient fraudster in Sumeria, who knows.

    The free market is a process, not a place or group of people. The free market process is one of voluntary exchange of private property. With FRB, it violates property rights because it generates more property titles than there are property. It therefore cannot be invented by the free market process.

    Governments have historically (with a few exceptions) encouraged FRB, both directly and indirectly. Directly by sanctioning it through law, and indirectly by threatening banks with theft, which gave huge incentives to bankers to have as little money on hand as possible, so as to minimize the theft.

    ReplyDelete
  31. "All loans have an underlying time period where it must be paid back. What is the time period implicit in a demand deposit?"

    Until the point in time when the holder of the demand deposit chooses to close his account,as stipulated in demand deposit contracts.

    ReplyDelete
  32. A LOAN is a deposit contract that gives banks ownership of the money.

    And a demand deposit is a mutuum, a loan.

    No, a demand deposit is not a loan. A loan is a loan. A demand deposit is a transfer of physical possession, not ownership.

    Your ridiculous position expresed above in other places entails that all freely made callable loan contracts are somehow "immoral" or "fraudulent".

    Not at all. A loan that has a callable option is not fraud nor is it immoral. You're still making things up.

    A demand deposit is essentially, as White says, "a type of callable loan where the lender is the account-holder and the borrower is the bank."

    White is wrong. The word "essentially" is his subconscious telling him that to say it is such a thing would be a lie.

    Things aren't "essentially" other things. Things are only themselves and nothing else.

    A loan is a loan, and a demand deposit is a demand deposit.

    Your constant confusion between two very different concepts is brought about by an inability to understand the fallacies of your justifications in equating them. All your justifications fail.

    ReplyDelete
  33. "All loans have an underlying time period where it must be paid back. What is the time period implicit in a demand deposit?"

    Until the point in time when the holder of the demand deposit chooses to close his account,as stipulated in demand deposit contracts.

    Hahaha, see? There is no pre-agreed time on contract. With loans, there are ALWAYS maturity dates. Sure, a loan might have some flexibility in changing the end date, but all loans have an original time period associated with them. That's what De Soto was talking about, contrary to your dumb and uninformed straw man.

    ReplyDelete
  34. "FRB is really an action. It is a coercive action. The first person to misappropriate someone else's money that was entrusted with them for safe keeping and made available at all times? Probably some ancient fraudster in Sumeria, who knows."

    So now your claim is that private individuals who were acting in a free market environment fraudulent created fractional reserve banking.

    "With FRB, it violates property rights because it generates more property titles than there are property."

    There is no such violation. The property title to the money given in a demand deposit
    to the bank that practises FRB passes to the bank.

    The depositor gets a contract that allows them to receive equivalent money up to the specified amount. Banks that have customers as clients freely engaging in this process are not committing fraud.

    ReplyDelete
  35. "There is no pre-agreed time on contract. With loans, there are ALWAYS maturity dates."

    That is rubbish.

    Perpetual bonds have no no maturity date: these can issued by banks.

    http://en.wikipedia.org/wiki/Perpetual_bond

    ReplyDelete
  36. "FRB is really an action. It is a coercive action. The first person to misappropriate someone else's money that was entrusted with them for safe keeping and made available at all times? Probably some ancient fraudster in Sumeria, who knows."

    So now your claim

    My arguments have not changed. To say "now" my claim is such and such conveys the dishonest impression that I have changed my arguments. I have not.

    is that private individuals who were acting in a free market environment fraudulent created fractional reserve banking.

    No. You keep implying that the free market is a place. It is not a place. This time you say "environment" which conveys location. The free market is a process.

    FRB fraud arose who knows when. Money has been used for millenia. It's impossible to make claims on when and where the first person committed FRB fraud, the same way it would be impossible to know when and where the first murder took place.

    "With FRB, it violates property rights because it generates more property titles than there are property."

    There is no such violation. The property title to the money given in a demand deposit
    to the bank that practises FRB passes to the bank.


    False. In a demand deposit, the property title is not transferred to the bank. It is retained by the client. You are talking about loans, not demand deposits.

    The depositor gets a contract that allows them to receive equivalent money up to the specified amount.

    No, the depositor does not get a contract. They sign a contract. A demand deposit contract is that the banks will keep the client's money safe and available at all times. Banks that loan demand deposit money out are thus committing fraud, because it's not being made available at all times.

    Fraud takes place not when it is discovered, but when the action takes place.

    Banks that have customers as clients freely engaging in this process are not committing fraud.

    Two people cannot contract to defraud or harm a third, even if the two people are acting voluntarily with each other.

    ReplyDelete
  37. A loan is a loan. A demand deposit is a transfer of physical possession, not ownership.

    Again: so all demand deposits that specify that banks now have ownership of the money given are just a fiction of the imagination, huh?

    ReplyDelete
  38. "There is no pre-agreed time on contract. With loans, there are ALWAYS maturity dates."

    That is rubbish.

    Perpetual bonds have no no maturity date: these can issued by banks.

    http://en.wikipedia.org/wiki/Perpetual_bond

    A perpetual bond issued is just equity of a specific type. The name "bond" is confusing you.

    It's really just an exchange of one sum of money for a series of perpetual cash flows. It's not a loan. A loan implies a payback.

    ReplyDelete
  39. "A loan is a loan. A demand deposit is a transfer of physical possession, not ownership."

    Again

    Do you see that? All you have is repeating the same fallacies. You have nothing else.

    so all demand deposits that specify that banks now have ownership of the money given are just a fiction of the imagination, huh?

    Those are not demand deposits. Transfers of ownership of money are loans, gifts, equity investments, etc. They are not demand deposits.

    You're letting the words rather than the meanings guide your thinking. If a contract said "you hereby have the right to flap your arms and fly off the top of my 100 story skyscraper" that would not be a contract of letting someone use your building as a flight center, it would be a contract allowing someone to commit suicide on your property.

    ReplyDelete
  40. "They sign a contract. A demand deposit contract is that the banks will keep the client's money safe and available at all times.

    LOL...
    That is such a statement of gross, laughable ignorance:

    The banking terms "deposit" and "withdrawal" tend to obscure the economic substance and legal essence of transactions in a deposit account. From a legal and financial accounting standpoint, the term "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds (whether cash or checks) themselves, which are shown an asset of the bank. For example, a depositor opening a checking account at a bank in the United States with $100 in currency surrenders legal title to the $100 in cash, which becomes an asset of the bank. On the bank's books, the bank debits its currency and coin on hand account for the $100 in cash, and credits a liability account (called a demand deposit account, checking account, etc.) for an equal amount. (See double-entry bookkeeping system.) In the audited financial statements of the bank, on the balance sheet, the $100 in currency would be shown as an asset of the bank on the left side of the balance sheet, and the deposit account would be shown as a liability owed by the bank to its customer, on the right side of the balance sheet. The bank's financial statement reflects the economic substance of the transaction -- which is the bank has actually borrowed $100 from its depositor and has contractually obliged itself to repay the customer according to the terms of the demand deposit account agreement. To offset this deposit liability, the bank now owns the actual, physical funds deposited, and shows those funds as an asset of the bank.

    http://en.wikipedia.org/wiki/Deposit_account

    Is it a fact or is not a fact that:

    (1) in modern demand deposit banking the contract the client signs stipulates that the ownership of the money deposited (either physical money or electronic) has passed to the bank, and

    (2) this is the understood legal status of the money under the law?

    Answer these 2 questions.

    ReplyDelete
  41. This is absurd. Banks have a service exactly like Pete's (false) description of demand deposits. They are called safety deposit boxes. You can always put cash or gold in them and get out the very same items.

    The ordinary dictionary definition of fraud requires a deliberate deception. People know exactly what a bank does with their money: loan it out.

    Fire insurers take in premia and establish contracts granting rights to specified payments on the occasion of a fire. These rights to payment are in aggregate, far in excess of the total premia collected.

    Banks take in deposits and establish contracts granting rights to specified payments upon demand, as specified in the deposit contract. These payments, in aggregate, far exceed the amounts retained by the bank.

    If in one of these situations, as Pete says, more than one title to the same property is created, then it must also be so in the other.

    ReplyDelete
  42. "A perpetual bond issued is just equity of a specific type. The name "bond" is confusing you."

    Modern perpetual bonds issued by private sector banks are not just equity. You can call them after a certian date - therefore their status when they become callable is just like a demand deposit.

    http://en.wikipedia.org/wiki/Perpetual_bond

    ReplyDelete
  43. Argosy Jones,

    This is the sheer irrationality, ignorance, and childish nonsense of Rothbardians.

    You have a clear fact: modern demand deposit contracts are clear that ownership of the money given passes to the bank.

    The Rothbardian response: "No, it doesn't!!!" (**stamps foot and cries like a baby**).

    ReplyDelete
  44. On a different note, here's a joke about capitalism:

    http://www.smbc-comics.com/index.php?db=comics&id=2383

    ReplyDelete
  45. "They sign a contract. A demand deposit contract is that the banks will keep the client's money safe and available at all times."

    The banking terms "deposit" and "withdrawal" tend to obscure the economic substance and legal essence of transactions in a deposit account. From a legal and financial accounting standpoint, the term "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds (whether cash or checks) themselves, which are shown an asset of the bank. For example, a depositor opening a checking account at a bank in the United States with $100 in currency surrenders legal title to the $100 in cash, which becomes an asset of the bank.

    That's false. A depositor does not surrender property ownership of their money when they open a demand deposit account.

    The quote you copied from Wikipedia is not cited or referenced at all. It just declares it. For all anyone knows, a moron or stooge created that entry. Wikipedia is simply not a credible source for issues such as these. No credible academic uses uncited wikipedia entries as the basis for their arguments.

    The fact that you can only refer to uncited claims from wikipedia is proof you have no argument.

    Is it a fact or is not a fact that:

    (1) in modern demand deposit banking the contract the client signs stipulates that the ownership of the money deposited (either physical money or electronic) has passed to the bank, and

    (2) this is the understood legal status of the money under the law?

    Answer these 2 questions.

    First off, positive laws be damned. The whole reason why fractional reserve banking fraud even exists is because the government has condoned it. In order to condone it, OF COURSE there will be a law that states demand deposit money is the legal property of the bank. But that does not mean that the law is just, economically valid, or even logical.

    Second, to answer your questions, no, demand deposit money does not become the property of the bank.

    "A perpetual bond issued is just equity of a specific type. The name "bond" is confusing you."

    Modern perpetual bonds issued by private sector banks are not just equity. You can call them after a certian date - therefore their status when they become callable is just like a demand deposit.

    Equity, specifically preferred stock, can also have callable options. The presence of a call option does not mean the transaction is a loan.

    A demand deposit does not have a callable option, because that would imply that ownership has been transferred to the bank, which is false. That a demand deposit is "like a call option on a loan" does not mean it IS a call option on a loan.

    Argosy Jones,

    This is the sheer irrationality, ignorance, and childish nonsense of Rothbardians.

    You have a clear fact: modern demand deposit contracts are clear that ownership of the money given passes to the bank.

    The Rothbardian response: "No, it doesn't!!!" (**stamps foot and cries like a baby**).

    LK,

    This is the sheer irrationality, ignorance, and childish nonsense of pro-FRB Keynesians.

    I have a clear fact: modern demand deposit contracts are clear that ownership of the money is not passed to the bank.

    The pro-FRB response: "Yes, it does!!!" (**stamps foot and cries like a baby**).

    ReplyDelete
  46. Argosy:

    This is absurd. Banks have a service exactly like Pete's (false) description of demand deposits. They are called safety deposit boxes. You can always put cash or gold in them and get out the very same items.

    Those are mutuum deposits, not tantundem demand deposit contracts.

    The ordinary dictionary definition of fraud requires a deliberate deception. People know exactly what a bank does with their money: loan it out.

    False. Over 70% of UK residents believe they don't.

    Fire insurers take in premia and establish contracts granting rights to specified payments on the occasion of a fire. These rights to payment are in aggregate, far in excess of the total premia collected.

    Premiums for insurance become the property of the insurer. Demand deposits do not become the property of the bank.

    Banks take in deposits and establish contracts granting rights to specified payments upon demand, as specified in the deposit contract. These payments, in aggregate, far exceed the amounts retained by the bank.

    Safe and available at all times means lending it out is a violation.

    If in one of these situations, as Pete says, more than one title to the same property is created, then it must also be so in the other.

    More than one property title for the same property is not created in regular insurance arrangements.

    ReplyDelete
  47. There is a simple flaw in the above pro-fractional reserve article: the more clued up opponents of FR do not rely on the “fraud” argument. Their objection to FR is that it is pro-cyclical: it promotes instability.

    When asset prices rise, that makes those assets better collateral, which encourages more borrowing, which raises asset prices still further: shares in the late 1920s and houses in the recent credit crunch.

    See for example:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

    ReplyDelete
  48. Ralph Musgrave,

    There are indeed economic arguments against unregulated fractional reserve banking systems, but I have chosen above mainly to deal with the alleged "moral" objections of Rothbardians.

    The solution to the instability of FRB systems is financial regulation, separation of commercial from investment banking, deposit insurance for commercial banks, and preventing either type of bank from causing destabilisng asset bubbles and reckless lending. A lender of last resort in the cnetral bank provides liquidity and the implements the state's monetray policy.

    ReplyDelete
  49. This is absurd. Banks have a service
    > exactly like Pete's (false) description of
    > demand deposits. They are called safety
    > deposit boxes. You can always put cash or
    > gold in them and get out the very same items.

    Those are mutuum deposits,


    No, they are not. Objects placed in safety deposit boxes are a depositum or depositum regulare (bailment for safekeeping), not a mutuum.

    ReplyDelete
  50. "The whole reason why fractional reserve banking fraud even exists is because the government has condoned it. In order to condone it, OF COURSE there will be a law that states demand deposit money is the legal property of the bank"

    So the law states that "demand deposit money is the legal property of the bank".

    Yet you state

    "That's false. A depositor does not surrender property ownership of their money when they open a demand deposit account.
    The quote you copied from Wikipedia is not cited or referenced at all."


    If you admit that the law in fact says that "demand deposit money is the legal property of the bank", then isn't Wikipedia saying the same thing?

    "The fact that you can only refer to uncited claims from wikipedia is proof you have no argument."

    I guess these were just figments of my imagination! :)

    Johnson, J. F. 1911. Banking Principles, Alexander Hamilton Institute, New York. p.117.

    MacLeod, H. D. 1902. Theory and Practice of Banking (6th edn), Longmans, Green, Reader, & Dyer, London. pp. 318-324.

    As for evidence for the legal nature of the mutuum/demand deposit, some random historical references culled from Google books (which you can check for yourself):

    (1) From an offical "Report of the Royal Commission appointed to inquire into the recent changes in the relative values of the precious metals: with minutes of evidence and appendices" by the British government, 1887:

    The essential feature of all these banks was to buy money from the subscribers as a mutuum, which thus became the property of the borrowers, and in exchange for the money they issued a credit, or a certificate with a promise to pay interest. p. 247.

    (2) Harlan Linneus McCracken, Value Theory and Business Cycles, p. 64, referring to the bank of England:

    "The Bank then proceeded to loan out or trade with a considerable portion of the deposits, since they were of the mutuum form, in which the title to the property was transferred to the bank with the deposit. "

    (3) Reports of cases at law and in equity argued and determined in the Supreme Court of Arkansas, Volume 7, p. 64:

    "In ordinary cases of deposits of money with banking corporations or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum when it is demanded."

    ReplyDelete
  51. "Those are not demand deposits. "

    In that case modern banks don't offer demand deposits as you define them.

    "With loans, there are ALWAYS maturity dates."

    So an overdraft is not a loan?

    Very simply when you go to a bank you buy a product. The state cash you give them buys you a number on a bank account which represents a contractual liability.

    It's no different from a savings stamps scheme at the supermarket, or prepayments for a Christmas hamper. It's a mere promise to give you something in the future, a contractual liability, and like all promises there are circumstances when it can be broken.

    So if banking is a fraud then so is pre-ordering a Christmas Turkey.

    The whole world revolves due to potential frauds. That's what commerce is.

    And it works because the potential frauds rarely turn into actual ones.

    ReplyDelete
  52. Neil:

    "Those are not demand deposits."

    In that case modern banks don't offer demand deposits as you define them.

    Absolutely. The government has played a crucial role in redefining demand deposits to be loans.

    "With loans, there are ALWAYS maturity dates."

    So an overdraft is not a loan?

    That's a tricky one. If there is no maturity date, then it's more a liability, like an overdue parking ticket, or a credit exchange whereby you delay payment on a purchase that has no maturity date.

    In all honesty I don't know what I would call it.

    Very simply when you go to a bank you buy a product. The state cash you give them buys you a number on a bank account which represents a contractual liability.

    "Buys" begs the question that a trade of property has taken place.

    So if banking is a fraud then so is pre-ordering a Christmas Turkey.

    That's kind of a stretch. I don't see how that follows.

    The whole world revolves due to potential frauds. That's what commerce is.

    Sure, but there is a difference between fleeting illegal fraud and institutional legalized fraud.

    ReplyDelete
  53. the more clued up opponents of FR do not rely on the “fraud” argument.

    I think we're almost all aware of that.

    Pete: What this all boils down to is that, in order to prove that fractional reserve demand deposits are a fraud, you require both a special definition of fraud, which apparently applies to no other circumstance than fractional reserve banking with demand deposits, and a special definition of demand deposits which doesn't correspond to actual contracts in use at present, or back, at the least, to the 19th century. How does that make you feel?

    Now let me extend another example and you tell me if it is a fraud. I go to a bank and make a time deposit (CD). This is in a 'free country', so there is no FDIC to guarantee the money. The bank straight up tells me that they use deposits to make loans to business ventures. But they promise to repay me with interest in 1 year. So this is a fractional reserve bank without demand deposits: all they do is CDs. Like most CDs these include an option to get my money out early at perhaps a 10% penalty. But they're only holding 10% of deposits on hand to meet demand for redemption. A banking system composed of such banks (according to the money multiplier theory) will effectively create money. Anyway, my individual bank cannot meet more than 10% of its liabilities on any given day. How is this any less of a fraud than a fractional reserve demand deposit?

    ReplyDelete
  54. Ralph:

    There is a simple flaw in the above pro-fractional reserve article: the more clued up opponents of FR do not rely on the “fraud” argument. Their objection to FR is that it is pro-cyclical: it promotes instability.

    When asset prices rise, that makes those assets better collateral, which encourages more borrowing, which raises asset prices still further: shares in the late 1920s and houses in the recent credit crunch.

    LK:

    There are indeed economic arguments against unregulated fractional reserve banking systems, but I have chosen above mainly to deal with the alleged "moral" objections of Rothbardians.

    Ralph touched on another, perhaps more convincing to you, argument about FRB. You accept the economic arguments against FRB, but you claim to be talking only about the moral arguments of FRB.

    But they are not separate. For suppose that I argued that it is immoral to enforce a pro-cyclical banking system that generates unemployment and thus economic hardships on people? This would be a consequentialist ethics type argument. How will you argue against that? It contains both Rothbardian economics and consequentialist ethics.

    Furthermore, I noticed that you slipped in the word "unregulated" fractional reserve banking. That is very revealing, not only because it shows that you accept that fractional reserve banking is economically destructive, but you also implicitly assume that the government regulators can know "how much is enough." That implicit assumption is based on what justification? How can the government know when one more credit expansion loan is "too much," but one less is "just enough"?

    Clearly all your posturing regarding protecting the private property rights of bankers and their clients to engage in FRB if they want was nothing but a smokescreen.

    You can't even keep your story straight. If you say that the government should "regulate" banks and FRB, then how in the world is that any different than the libertarian anti-FRB advocate calling for enforcement to "regulate" bankers and FRB?

    Can you see the massive contradiction in your claims? I sure do.

    The solution to the instability of FRB systems is financial regulation, separation of commercial from investment banking, deposit insurance for commercial banks, and preventing either type of bank from causing destabilisng asset bubbles and reckless lending. A lender of last resort in the cnetral bank provides liquidity and the implements the state's monetray policy.

    You mean you want individuals in the state to violate the private property rights of bankers and their clients? You want the individuals in the state to use force to stop voluntary contracts between bankers and clients, who agree to FRB generating contracts? How immoral of you!

    Oh that's right. It's only immoral to want to stop FRB when YOU say so. But not when libertarians say so.

    ReplyDelete
  55. Also:

    Credit card debt constitutes a loan without a fixed term.

    ReplyDelete
  56. No, they are not. Objects placed in safety deposit boxes are a depositum or depositum regulare (bailment for safekeeping), not a mutuum.

    Yup, you're right. I goofed. At least I was right that it's not a tantundem though, which is the crucial point. My Latin needs work.

    ReplyDelete
  57. "You accept the economic arguments against FRB, but you claim to be talking only about the moral arguments of FRB."

    Correct. If you want to have an argument about the "economic" merits/flaws of FRB, then that is very different from the FRB is fraudulent and "should-be-banned" argument.

    There are powerful economic arguments in favour of fractional reserve banking, as George Selgin explains:

    “RF: Do you consider fractional reserve banking inherently problematic? Does free banking require a commodity standard so private banks don’t issue too much currency? ....

    Selgin: .... As for fractional reserve banking, I think it’s a wonderful institution and that it’s crazy to argue that we need to get rid of it to have a stable monetary regime. Those self-styled Austrian economists, mostly followers of Murray Rothbard, who insist on its fraudulent nature or inherent instability are, frankly, making poor arguments. I don’t think the evidence supports their view, and that they overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment ….


    http://www.richmondfed.org/publications/research/region_focus/2009/winter/full_interview.cfm

    However, I do not think that a free banking system is the "best" system that can be devised, as I have explained above.

    You can have the benefits of FRB without the potential severe instabilities as I have shown.

    ReplyDelete
  58. "The whole reason why fractional reserve banking fraud even exists is because the government has condoned it. In order to condone it, OF COURSE there will be a law that states demand deposit money is the legal property of the bank"

    So the law states that "demand deposit money is the legal property of the bank".

    Yet you state

    "That's false. A depositor does not surrender property ownership of their money when they open a demand deposit account.
    The quote you copied from Wikipedia is not cited or referenced at all."


    If you admit that the law in fact says that "demand deposit money is the legal property of the bank", then isn't Wikipedia saying the same thing?

    I don't base ANY argument I make about what is right, just, or moral, on positive law. It's just not in my mental vocabulary. They're not my laws. They're the government's laws. I have my own set of laws that are just and unjust. Whether they match positive laws is purely coincidental.

    "The fact that you can only refer to uncited claims from wikipedia is proof you have no argument."

    I guess these were just figments of my imagination! :)

    I would much rather see the actual government law that says demand deposits become the property of the bank.

    I don't know what the positive law states today.

    As for evidence for the legal nature of the mutuum/demand deposit, some random historical references culled from Google books (which you can check for yourself):

    (1) From an offical "Report of the Royal Commission appointed to inquire into the recent changes in the relative values of the precious metals: with minutes of evidence and appendices" by the British government, 1887:

    The essential feature of all these banks was to buy money from the subscribers as a mutuum, which thus became the property of the borrowers, and in exchange for the money they issued a credit, or a certificate with a promise to pay interest. p. 247.

    Justifying FRB on the basis that demand deposits are loans has been around since at least the Medicis, and no doubt sooner as well. The temptation of bankers to loan out money at interest, that would otherwise be just "sitting there", is very great. It shouldn't be surprising that it is a very old institution. It's like taxation in that sense.

    (2) Harlan Linneus McCracken, Value Theory and Business Cycles, p. 64, referring to the bank of England:

    "The Bank then proceeded to loan out or trade with a considerable portion of the deposits, since they were of the mutuum form, in which the title to the property was transferred to the bank with the deposit."

    Sure, loans to the bank can be loaned by the bank. Are you sure they were talking about tantundem contracts? (Hope I got the Latin right this time).

    (3) Reports of cases at law and in equity argued and determined in the Supreme Court of Arkansas, Volume 7, p. 64:

    "In ordinary cases of deposits of money with banking corporations or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum when it is demanded."

    The chapter in which that quote is found is titles "LOAN." That's not a demand deposit.

    ReplyDelete
  59. "Justifying FRB on the basis that demand deposits are loans has been around since at least the Medicis, and no doubt sooner as well. The temptation of bankers to loan out money at interest, that would otherwise be just "sitting there", is very great. It shouldn't be surprising that it is a very old institution. "

    What? So are you now just admitting that this is how in fact demand deposits are understood in demand deposit contracts and in state law?

    "> In ordinary cases of deposits of money
    > with banking corporations or bankers, the
    > transaction amounts to a mere loan or
    > mutuum, and the bank is to restore, not the > same money, but an equivalent sum when > it is demanded."

    The chapter in which that quote is found is titles "LOAN." That's not a demand deposit.


    LOL... Oh my god.

    Note carefully the words:

    the bank is to restore, not the same money, but an equivalent sum when it is demanded.

    So it is an account where the equivalent sum when it is "demanded", yet, accoridng to you, that "that's not a demand deposit".

    This is the point when you have lost all shred of credibilty.

    ReplyDelete
  60. "You accept the economic arguments against FRB, but you claim to be talking only about the moral arguments of FRB."

    Correct. If you want to have an argument about the "economic" merits/flaws of FRB, then that is very different from the FRB is fraudulent and "should-be-banned" argument.

    I noticed that you did not respond to my moral claim regarding FRB, so I will say it again:

    Suppose that I argued that it is immoral to enforce a pro-cyclical banking system because it generates unemployment and thus economic hardships on people? This would be a consequentialist ethics type argument. How will you argue against that?

    There are powerful economic arguments in favour of fractional reserve banking, as George Selgin explains:

    “RF: Do you consider fractional reserve banking inherently problematic? Does free banking require a commodity standard so private banks don’t issue too much currency? ....

    Selgin: .... As for fractional reserve banking, I think it’s a wonderful institution and that it’s crazy to argue that we need to get rid of it to have a stable monetary regime. Those self-styled Austrian economists, mostly followers of Murray Rothbard, who insist on its fraudulent nature or inherent instability are, frankly, making poor arguments. I don’t think the evidence supports their view, and that they overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment ….

    With all due respect to Selgin, how in the world is that a "powerful economics argument"?

    All he said here is that "it's wonderful", without showing why, and that those who say it's fraud are "making poor arguments", without showing how, that the evidence "does not support their view", without referring to any evidence, and that frb "fosters investment" without showing how.

    If you call THAT "powerful" then goodness I would shudder to think that are weak arguments. Maybe "LOOOOOOVE IT!!!"????

    However, I do not think that a free banking system is the "best" system that can be devised, as I have explained above.

    Yes, you want the government to violate private property rights and tell bankers and their clients that they are not allowed to engage in frb when you think there is "enough", and then, you have the gall to chastise me for wanting to enforce against FRB.

    You can have the benefits of FRB without the potential severe instabilities as I have shown.

    You have not shown that. Merely saying "the government will take care of it" is not an argument. Merely chanting the mantra of "regulation" doesn't serve as a critical analysis of exactly how much FRB is enough, nor how to arrive at such a conclusion rationally, by what means, or anything. Do you know WHY all you can say is "regulate!"? It's because you don't understand the concept of economic calculation, as many commentators have noticed of you.

    ReplyDelete
  61. Argosy:

    Pete: What this all boils down to is that, in order to prove that fractional reserve demand deposits are a fraud, you require both a special definition of fraud, which apparently applies to no other circumstance than fractional reserve banking with demand deposits, and a special definition of demand deposits which doesn't correspond to actual contracts in use at present, or back, at the least, to the 19th century. How does that make you feel?

    I feel very little when you say that. I am thinking though, but since you didn't ask...

    Now let me extend another example and you tell me if it is a fraud. I go to a bank and make a time deposit (CD). This is in a 'free country', so there is no FDIC to guarantee the money. The bank straight up tells me that they use deposits to make loans to business ventures. But they promise to repay me with interest in 1 year. So this is a fractional reserve bank without demand deposits: all they do is CDs. Like most CDs these include an option to get my money out early at perhaps a 10% penalty. But they're only holding 10% of deposits on hand to meet demand for redemption. A banking system composed of such banks (according to the money multiplier theory) will effectively create money. Anyway, my individual bank cannot meet more than 10% of its liabilities on any given day. How is this any less of a fraud than a fractional reserve demand deposit?

    A CD time deposit is a loan. It becomes the bank's property for the term of the loan. They are therefore justified in loaning that money out.

    ReplyDelete
  62. "Suppose that I argued that it is immoral to enforce a pro-cyclical banking system because it generates unemployment and thus economic hardships on people? "

    (1) fractional reserve banking is not "enforced" on society, as though people are coerced and made to do it. If people wanted a 100% warehouse paying no interest or largely banks with only time deposits, then the market would have provided those businesses.

    (2) you can of course make a consequentialist argument for regulating FRB in the way I have described above by considering owing to its pro-cyclical affects on the business cycle.
    But banning it would cause serious prblems too, by making the money supply inflexible and choking off opportunities for investment and economic growth. Capitalism invented FRB and fidicuary media for a reason: it facilitated commerce, trade business and industrial investment.

    ReplyDelete
  63. "Justifying FRB on the basis that demand deposits are loans has been around since at least the Medicis, and no doubt sooner as well. The temptation of bankers to loan out money at interest, that would otherwise be just "sitting there", is very great. It shouldn't be surprising that it is a very old institution."

    What? So are you now just admitting that this is how in fact demand deposits are understood in demand deposit contracts and in state law?

    Huh? How is saying that the temptation for bankers to loan out their client's money constitute an "admission" of something I haven't already said? I already said that positive law treats demand deposits as loans.

    The chapter in which that quote is found is titles "LOAN." That's not a demand deposit.

    Note carefully the words:

    the bank is to restore, not the same money, but an equivalent sum when it is demanded.

    That is just a statement of the tantundem nature of all deposits, demand or otherwise.

    So it is an account where the equivalent sum when it is "demanded", yet, accoridng to you, that "that's not a demand deposit".

    Now you're letting the word "demand" confuse you. Demand deposits that are kept safe and available at all times are equivalent to tantundem available at all times. According to me, loans are not demand deposits.

    This is the point when you have lost all shred of credibilty.

    How so? All I see is more confusion on your part.

    ReplyDelete
  64. Pete:
    I feel very little when you say that. I am thinking though, but since you didn't ask...

    Thanks, that's all I wanted to know.

    A CD time deposit is a loan. It becomes the bank's property for the term of the loan. They are therefore justified in loaning that money out.

    But wouldn't a banking system consisting of banks with fractional reserve time deposits be nearly as destabilising (in the Austrian view) as fractional reserve demand deposits? Why Not?

    ReplyDelete
  65. "Suppose that I argued that it is immoral to enforce a pro-cyclical banking system because it generates unemployment and thus economic hardships on people?"

    (1) fractional reserve banking is not "enforced" on society, as though people are coerced and made to do it. If people wanted a 100% warehouse paying no interest or largely banks with only time deposits, then the market would have provided those businesses.

    By "enforce", I do not mean coerced. I mean protected by law. To say that laws on murder are enforced does not mean that murder is mandatory.

    (2) you can of course make a consequentialist argument for regulating FRB in the way I have described above by considering owing to its pro-cyclical affects on the business cycle.

    But banning it would cause serious prblems too, by making the money supply inflexible and choking off opportunities for investment and economic growth.

    How does money supply inflexibility "choke off opportunities for investment"?

    Creating new money does not create new capital goods. It just redistributes capital.

    What if the central bank just printed off money and gave it to people, and circumvent the credit mechanism of the commercial banks? Could FRB be absolutely banned then?

    Capitalism invented FRB and fidicuary media for a reason: it facilitated commerce, trade business and industrial investment.

    Just world fallacy. No, FRB was created because of opportunities for defrauding demand deposit clients presented themselves, and bankers took advantage of the opportunity, traditionally in almost all countries with the sanction of the state.

    It's interesting how you have gone from being pro-frb, to being anti-frb but not 100% anti-frb. You are still hanging on to it, and hoping that "flexibility" arguments can save you.

    But monetary inflexibility is just another word for sound money. It is simply not true that credit expansion is needed for economic growth. A rigid money supply can facilitate any level of economic growth by gradually falling prices and costs.

    If people can raise prices by 2% per year in inflation, why can't they decrease prices by 2% per year in a sound money system, on the basis of productivity growth? Electronics producers have no problems decreasing their prices when they produce more.

    Your last vestige is the myth that falling prices based on increasing productivity is an evil.

    Individual banks, who issue credit, can't know what the "correct" money supply should be. You can't say that because aggregate spending should be such and such, that bankers should expand. Bankers don't lend into GDP. They lend into individual markets and individual firms.

    Where is the economic calculation foundation of your arguments? It's sorely lacking. How will the banks know how much credit to expand if you say that the goal is some macroeconomic statistic? It's untenable.

    ReplyDelete
  66. you can of course make a consequentialist argument for regulating FRB in the way I have described above by considering owing to its pro-cyclical affects on the business cycle.

    It's also rather striking that you now adhere to the Austrian theory of the business cycle. Imagine that. A Post-Keynesian, Austrian antagonist is now professing ABCT.

    I guess I will take the credit for bringing you one step into the light side away from the dark side.

    Logic is a bitch, isn't it? LOL

    ReplyDelete
  67. "It's also rather striking that you now adhere to the Austrian theory of the business cycle."

    I do not adhere to ABCT. I do not believe in a bank rate falling below the non-existent, mythical unique natural rate of interest that supposedly causes overinvestment in the higher-order capital goods sector leading to some "inevitable" bust.

    FRB is pro-cyclical because they can fuel debt leveraged asset bubbles and the FR bank collapses destroy people's savings, contracting aggreage demand.

    ReplyDelete
  68. Let me see.

    So if I want to make a deposit in a bank that uses fractional reserve (and I know that it uses FRB, I'm perfectly aware of what will happen when I sign the contract), Pete will INITIATE FORCE (a.k.a. COERCION) against me, a pacific individual who merely wants to engage in a voluntary exchange. He will unleash his MEN WITH GUNS on me and on the innocent bank just because he doesn't like my business decisions.

    What a statist tyrant this Pete guy is. The only difference between him and Stalin is one of degree.

    ReplyDelete
  69. "Creating new money does not create new capital goods. It just redistributes capital."

    Creating fiduciary media provides traders, business people the credit they need for investment. You assume an economy running at full employment.

    ReplyDelete
  70. Anonymous,

    "Pete will INITIATE FORCE (a.k.a. COERCION) against me, "

    I imagine the Rothbardians would allow the anarcho-capitalist private "protection" agencies to do that.

    ReplyDelete
  71. "By "enforce", I do not mean coerced. I mean protected by law."

    Pete lives in a magical world where laws don't need enforcement, they just happen. As if by a force of nature or something.

    Protip: law really is just armed men. Any law you want, even ~*♥property rights♥*~ exist only because people with guns make it so.

    Also, you do not know what a "just world fallacy" entails. A JWF is about a moral judgment of the world. LK's post was arguing that FRB existed because it was what people involved considered efficient -- there was no moral judgment at all.

    I'm sure there are lots of other things you have shown your magnificent ignorance about in these posts, but I'm not going to subject my eyes to this torment.

    ReplyDelete
  72. > the bank is to restore, not the same
    > money, but an equivalent sum when it is
    > demanded.

    That is just a statement of the tantundem nature of all deposits, demand or otherwise.


    What? So it is a demand deposit?

    ReplyDelete
  73. "It's also rather striking that you now adhere to the Austrian theory of the business cycle."

    I do not adhere to ABCT. I do not believe in a bank rate falling below the non-existent, mythical unique natural rate of interest that supposedly causes overinvestment in the higher-order capital goods sector leading to some "inevitable" bust.

    ABCT does not require a single natural interest rate. It only requires nominal interest rates to be lowered via increasing the supply of investment as greater than the supply of real savings, through inflation and credit expansion.

    Are you suggesting that whatever interest rates the Fed sets into motion, are always and exactly equal to the interest rates that would exist in a free market?

    FRB is pro-cyclical because they can fuel debt leveraged asset bubbles and the FR bank collapses destroy people's savings, contracting aggreage demand.

    This contradicts your earlier claim that FRB does not lead to an overinvestment in the higher order capital stages. Now you're saying it can fuel asset bubbles.

    "Creating new money does not create new capital goods. It just redistributes capital."

    Creating fiduciary media provides traders, business people the credit they need for investment.

    Credit that is generated by voluntary savings only is fully capable of accommodating maximum investment. You're fallaciously assuming that without credit expanding, investors won't be able to get credit. That's false. Credit expansion means that it expands from a given aggregate sum of credit to a higher aggregate sum of credit. The given aggregate sum of credit is capable of accommodating all resource utilization, as long as prices are low enough, which they will tend to become if the demand for capital in nominal terms remains stable or gradually increases. At some point, owners of capital who are "holding out" will capitulate if it means selling for something versus nothing.

    You assume an economy running at full employment.

    No, I am not. What I said does not require full employment or full resource utilization at all. Credit expansion redistributes ownership of capital away from where it would have otherwise gone. That capital goes from a current hold out to someone else on account of the credit expansion does not mean that capital has not been redistributed. It has. You're fallaciously presuming that "idle resources" will STAY idle unless there is credit expansion. Credit expansion does not cease redistributing capital simply because a subset of capital owners are currently holding out for higher prices.

    "That is just a statement of the tantundem nature of all deposits, demand or otherwise."

    What? So it is a demand deposit?

    There is not enough information to make a judgment. It could either be a callable bond, or a demand deposit.

    ReplyDelete
  74. Anonymous:

    So if I want to make a deposit in a bank that uses fractional reserve (and I know that it uses FRB, I'm perfectly aware of what will happen when I sign the contract), Pete will INITIATE FORCE (a.k.a. COERCION) against me, a pacific individual who merely wants to engage in a voluntary exchange. He will unleash his MEN WITH GUNS on me and on the innocent bank just because he doesn't like my business decisions.

    The bank isn't innocent, and you would not be innocent either. You aren't interested in a voluntary exchange, because if you were, you'd choose whether you own that money or if the bank owns the money. If you own the money, it's a demand deposit, which means it would be fraud if the bank also granted ownership to someone else. If the bank takes ownership, then it's a loan, and they would have the right to transfer ownership to a third party.

    What a statist tyrant this Pete guy is. The only difference between him and Stalin is one of degree.

    I think you mistook me for LK. He is the one who wants to point guns at private property owners who want to engage in peaceful, non-fraudulent economic activity.

    ReplyDelete
  75. I imagine the Rothbardians would allow the anarcho-capitalist private "protection" agencies to do that.

    We'll be protecting both ourselves and the millions of people who suffer from the business cycle that is generated by it.

    ReplyDelete
  76. Anonymous:

    "By "enforce", I do not mean coerced. I mean protected by law."

    Pete lives in a magical world where laws don't need enforcement, they just happen. As if by a force of nature or something.

    No, you misunderstand. Coercion is an initiation of force. Protected by law means no legal enforcement, until someone uses force against it.

    Protip: law really is just armed men. Any law you want, even ~*♥property rights♥*~ exist only because people with guns make it so.

    Property rights is inherent in peaceful human life. Resources are scarce. Peaceful cooperation requires rules on resources, i.e. formation of property.

    You are an advocate of property rights yourself you communist. The only difference is that you are OK with more than one individual owning the same property jointly, but arbitrarily against individuals owning property because it's "evil." 100 people owning a private hippie commune? Good. One individual owning a private factory? Bad.

    Also, you do not know what a "just world fallacy" entails. A JWF is about a moral judgment of the world.

    You obviously don't know the just world fallacy. No, a just world fallacy is not a moral judgment of the world, it is the tendency for people to believe in the face of evil that the world is fundamentally just, and so the evil has a good reason.

    You said:

    "Capitalism invented FRB and fidicuary media for a reason: it facilitated commerce, trade business and industrial investment."

    This is the just world fallacy because it ignores the possibility that FRB arose because of dishonest and unscrupulous desires.

    LK's post was arguing that FRB existed because it was what people involved considered efficient -- there was no moral judgment at all.

    "Efficient" how? Individuals are self-interested.

    I'm sure there are lots of other things you have shown your magnificent ignorance about in these posts, but I'm not going to subject my eyes to this torment.

    You haven't shown a first thing I am ignorant about. How can there be "lots of other things" as well?

    ReplyDelete
  77. "This contradicts your earlier claim that FRB does not lead to an overinvestment in the higher order capital stages. Now you're saying it can fuel asset bubbles."

    Bidding up asset prices (financial or real) on secondary markets is not "overinvestment in the higher order capital stages". What are you even talking about.

    ReplyDelete
  78. "This contradicts your earlier claim that FRB does not lead to an overinvestment in the higher order capital stages. Now you're saying it can fuel asset bubbles."

    Bidding up asset prices (financial or real) on secondary markets is not "overinvestment in the higher order capital stages". What are you even talking about.

    Buying financial and real assets IS an investment! Buying real assets (longer term, which are more sensitive to interest rates declining) IS investment in higher order capital stages!

    ReplyDelete
  79. Buying a financial asset on a secondary market or even a real asset on a secondary and holding it for speculative purposes is not an "investment" required by ABCT, which posits capital goods investment drawing factor inputs away from lower order stages of production.

    This is more drivel.

    ReplyDelete
  80. It's clear you're presuming that the stock and bond markets are completely divorced from the real economy, such that prices of financial securities can rise without any effect on the structure of production, totally oblivious to the fact that the reason why stock market crashes affect the real economy is because the real economy actually utilizes the funds sloshing around in the stock and bond markets.

    ReplyDelete
  81. It's clear you're presuming that the stock and bond markets are completely divorced from the real economy

    Since I already said above that FRB can bid up asset prices and (unless you are grossly ignorant) you must know that I hold Fisher's debt deflation theory/Minsky's FIH. The idea that I think financial asset prices have no effect on the real economy is nonsense.

    ReplyDelete
  82. Since I already said above that FRB can bid up asset prices and (unless you are grossly ignorant) you must know that I hold Fisher's debt deflation theory/Minsky's FIH. The idea that I think financial asset prices have no effect on the real economy is nonsense.

    You keep evading and moving the goal posts.

    First I said that

    "Buying financial and real assets IS an investment! Buying real assets (longer term, which are more sensitive to interest rates declining) IS investment in higher order capital stages!"

    You then completely ignored the call for connection between stock and bond prices and capital goods investment, by remaining in a weird ephemeral world where stock and bond prices are totally divorced from the real economy, by saying:

    "Buying a financial asset on a secondary market or even a real asset on a secondary and holding it for speculative purposes is not an "investment" required by ABCT"

    As if I even said that mere stock and bond purchases in the "secondary" market are themselves investments in capital goods.

    My point has all along been that stock and bond prices, since they affect capital goods investment, means that whatever affects the former, affects the latter. That means that if credit expansion affects stock and bond prices, then it affects capital goods prices as well, which in other words means that credit expansion affects capital goods investment as per ABCT.

    Thus, by you admitting that credit expansion via FRB can blow up asset bubbles, you contradicted your other claim that FRB does not affect capital goods investment.

    ReplyDelete
  83. FRB does not affect capital goods investment in the way required by ABCT, which is the same thing that I have said above, because whatever the bank rate might be, there is no unique natural rate that it can fall below.

    ReplyDelete
  84. Anyway, this discussion has now moved far from the point of the original post.

    Your attempts above to deny that in FRB the clients hand ownership of the money to the bank have all failed.

    ReplyDelete
  85. FRB does not affect capital goods investment in the way required by ABCT, which is the same thing that I have said above, because whatever the bank rate might be, there is no unique natural rate that it can fall below.

    ABCT does not require a single natural rate. There can be multiple natural interest rates. There were many mortgage rates in the housing market during the bubble and collapse, and ABCT can explain it from start to finish. The Fed held the overnight rate below 2%, which signified huge gobs of reserves and credit expansion, which fueled the housing bubble. Over $2 trillion of new funds poured into the housing market from 2001-2005.

    The fact that there were many different mortgage interest rates does not invalidate ABCT.

    You're wrong. FRB does affect capital goods investment in the way required by ABCT. Interest rates do not affect all capital goods equally. Longer term capital goods prices are way more susceptible to interest rate changes than shorter term capital goods. When rates are artificially lowered by the Fed, it affects longer term capital goods prices by more than shorter term capital goods prices.

    The Fed sets interest rates to be lower than market interest rates. ABCT follows from one or a million different natural interest rates.

    You STILL have not shown how the assumption of multiple natural interest rates invalidates ABCT. All you have said over and over is "there is no single natural rate!" without any semblance of explanation or implication.

    ReplyDelete
  86. Anyway, this discussion has now moved far from the point of the original post.

    Ah, I sense that you will soon begin a process of comment purging once again because you can't justify how the introduction of multiple natural interest rates invalidates ABCT.

    Censor the truth, hope it goes away.

    Your attempts above to deny that in FRB the clients hand ownership of the money to the bank have all failed.

    No, they have all succeeded. ALL your attempts to justify FRB have failed. Your confusion in conflating demand deposit contracts with loan contracts, and your repetitive claim that demand deposits are loans, have all failed.

    Your response to the argument of the existence of more than one property title to the same property has failed.

    Your half-way response to the moral argument that it is immoral to enforce/protect a FRB system that is "pro-cyclical", by falling back on "the government will know how much FRB is enough and how much is not enough" has utterly failed.

    ALL your pro-FRB arguments have failed.

    ReplyDelete
  87. "Your confusion in conflating demand deposit contracts with loan contracts, and your repetitive claim that demand deposits are loans, have all failed."

    LOL.. "my" claim. I guess the centuries of legal practice don't count...

    Oh, yes, about that:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/mutuum-contract-in-american-law.html

    ReplyDelete
  88. "Your response to the argument of the existence of more than one property title to the same property has failed."

    The non-existence of 2 property titles to money delivered in a demand deposit was already demonstrated above a long time ago.

    ReplyDelete
  89. No, you misunderstand. Coercion is an initiation of force. Protected by law means no legal enforcement, until someone uses force against it.

    Here, I will make this clear because your only initiation in anything close to legal philosophy seems to have been Rothbard or something. A secret: Rothbard is a bad philosopher.

    Area A and Area B are two identical traces of land, except that Area A is somehow declared to be John's property and area B is declared to be unowned. Without asking John, Bob enters area A and Smith enters area B. John doesn't like either situation, so he has armed people to remove Bob from Area A and Smith from Area B, at gunpoint.

    Materially speaking (that is, ignoring all norms in these relations, looking only at what is happening), both of these situations are the same thing. But the libertarian is fine with the first case because lol property. I'm not even making up an absurd scenario: the libertarian debate over intellectual property is pretty much an example of this situation. Those who support IP say that it is okay to enforce it, those who don't say it is COERSHUN.

    To put it this way, you are trying to establish a norm that says "violence is wrong." Yeah, sure. But libertarianism doesn't say just that, before saying that violence is wrong, libertarianism establishes other norms, property rights, which you can use violence (a.k.a. physical force) to enforce. It legitimizes one sort of violence (the one used to enforce property rights) in detriment of the rest.

    (not something bad in itself, of course, this is what all legal systems do: establish a norm and use violence to enforce it, while repressing all other sorts. Which is why complaints about lol coercin iz baed are ridiculous.)

    Which is to say, the sad little joke that passes for the non-aggression principle and libertarian "legal philosophy" (it hurts so much to type that! Imagine, putting the likes of Rothbard in the same group as Ross or Kelsen!) boils down to "violence is illegitimate, except when it isn't." Oh, really?

    Property rights is inherent in peaceful human life. Resources are scarce. Peaceful cooperation requires rules on resources, i.e. formation of property.

    Oh, what the hell, this paragraph doesn't make any sense.

    "Peaceful cooperation requires rules"? No, "peaceful cooperation" (if by that we mean people shutting up and following the law) is the result of rules. In this sense, all laws result in "peaceful cooperation", because even in Stalin's Russia there was room for some autonomy of the will. It is like norms that say we should "give to each his own." Really?

    No, a just world fallacy is not a moral judgment of the world, it is the tendency for people to believe in the face of evil that the world is fundamentally just, and so the evil has a good reason.

    . . . which is not what LK argued, by the way. His point didn't have anything to do with the justice of FRB, but that it had arisen for some economic reason.

    ReplyDelete
  90. "Your confusion in conflating demand deposit contracts with loan contracts, and your repetitive claim that demand deposits are loans, have all failed."

    LOL.. "my" claim. I guess the centuries of legal practice don't count...

    First, nobody disputed that governments have legalized FRB by allowing banks to pretend that demand deposits are loans. Second, it doesn't matter if history is such, you still claim that demand deposits are loans.

    Oh, yes, about that:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/mutuum-contract-in-american-law.html

    Yes, there are two types of loans, those that consist of the exact money and those that are tantundem. They are not demand deposits.

    "Your response to the argument of the existence of more than one property title to the same property has failed."

    The non-existence of 2 property titles to money delivered in a demand deposit was already demonstrated above a long time ago.

    No, it wasn't. You failed to disprove it. That more property titles than there exists property in FRB has been established a long time ago.

    Demand deposits do not transfer ownership rights.

    ReplyDelete
  91. Anonymous:

    1/2

    Here, I will make this clear because your only initiation in anything close to legal philosophy seems to have been Rothbard or something. A secret: Rothbard is a bad philosopher.

    You would like to think so. I have "initiated" myself into many other legal philosophies besides just Rothbard. No secret: Rothbard was a brilliant philosopher.

    Area A and Area B are two identical traces of land, except that Area A is somehow declared to be John's property and area B is declared to be unowned.

    Right away you ignore how the ownership came to be.

    Without asking John, Bob enters area A and Smith enters area B. John doesn't like either situation, so he has armed people to remove Bob from Area A and Smith from Area B, at gunpoint.

    Bob trespassed, Smith did not. John violated Smith.

    Materially speaking (that is, ignoring all norms in these relations, looking only at what is happening), both of these situations are the same thing.

    No, they are not.

    But the libertarian is fine with the first case because lol property.

    No, the libertarian would be fine with the second case because lol property. Communists are private property advocates as well, they just arbitrarily want no less than two individuals owning land, because that's the only way a "commune" can exist. They too will argue that they are justified in protecting their land against trespassers.

    I'm not even making up an absurd scenario: the libertarian debate over intellectual property is pretty much an example of this situation. Those who support IP say that it is okay to enforce it, those who don't say it is COERSHUN.

    You obviously have not read any libertarian philosophy. "Pretty much" is the give away.

    To put it this way, you are trying to establish a norm that says "violence is wrong." Yeah, sure. But libertarianism doesn't say just that

    It doesn't even say that. It says that INITIATING violence is wrong.

    before saying that violence is wrong, libertarianism establishes other norms, property rights, which you can use violence (a.k.a. physical force) to enforce. It legitimizes one sort of violence (the one used to enforce property rights) in detriment of the rest.

    Of course. The individual has a right to protect their bodies and their livelihood.

    ReplyDelete
  92. Anonymous:

    2/2


    (not something bad in itself, of course, this is what all legal systems do: establish a norm and use violence to enforce it, while repressing all other sorts. Which is why complaints about lol coercin iz baed are ridiculous.)

    Defending oneself from violence, with violence, is not "coercion." Coercion is an initiation. It is justified to "complain" of coercion.

    Which is to say, the sad little joke that passes for the non-aggression principle and libertarian "legal philosophy" (it hurts so much to type that!

    What "sad little joke"? You're conflating your ignorance with an alleged lacking in libertarianism.

    Imagine, putting the likes of Rothbard in the same group as Ross or Kelsen!) boils down to "violence is illegitimate, except when it isn't." Oh, really?

    Straw man. Initiations of violence is morally wrong, and there are no exceptions.

    Rothbard would wipe the floor with Ross and Kelsen.

    Oh, what the hell, this paragraph doesn't make any sense.

    Yes, it does. Read it again slowly.

    "Peaceful cooperation requires rules"? No, "peaceful cooperation" (if by that we mean people shutting up and following the law) is the result of rules.

    No, peaceful cooperation requires rules. It is not the result of rules. Rules that are themselves initiations of violence cannot cause peace. You have it backwards.

    In this sense, all laws result in "peaceful cooperation", because even in Stalin's Russia there was room for some autonomy of the will.

    The full rightful autonomy of will was virtually eliminated, by initiations of violence.

    It is like norms that say we should "give to each his own." Really?

    Huh?

    No, a just world fallacy is not a moral judgment of the world, it is the tendency for people to believe in the face of evil that the world is fundamentally just, and so the evil has a good reason.

    . . . which is not what LK argued, by the way.

    I know, by the way. I said YOU argued it. Wow.

    ReplyDelete
  93. Re George Selgin, he is clueless. Have a look at this paper of his – “Should we let banks create money?” His mistakes are so basic and so glaring, that it is easy to read straight past them without noticing them. See:

    http://www.independent.org/pdf/tir/tir_05_1_selgin.pdf

    On his p.99 he argues that because a full reserve gold based money produces an inadequate stock of money, therefor we have to have fractional reserve. The flaw in that argument is that the latter two systems are not the only possible systems: a fiat based full reserve is a possibility. Indeed, the latter is EXACTLY WHAT most people who favour full reserve have in mind.

    Second, the argument that starts on his p.97 is as clear as mud, but he SEEMS TO ARGUE that fractional reserve is OK because commercial banks do not issue money unless there is a DEMAND for that money. So does that mean that where there is a demand for money to engage in ramping up share prices in the late 1920s or houses prices prior to the recent credit crunch, that’s OK? I think not.

    ReplyDelete
  94. Professor Selgin's papers have great merit in refuting the ignorant Rothbarian anti-fractional reserve banking theology.

    One does not have to agree with him on commodity money or free banking (I certainly do not and favour fiat money and central banks) to accept his critique of Hoppe, Rothbard, Block etc.

    ReplyDelete
  95. part 1.

    Ah, little Pete, I would really like to think you have initiated yourself in many legal philosophies. I really would, it would make me warm in the inside, because it would mean that there are more knowledgeable people in the world, who would post more interesting things in blogs than libertarian nonsense. But I think it is not the case, because you think Rothbard is a brilliant philosopher.

    Right away you ignore how the ownership came to be.

    How "ownership" came to be is irrelevant in this case because I was looking at the material reality. "How ownership came to be" is a legal relation, it depends on norms, which were explicitly abstracted away because we were examining only the material reality of this case.

    Bob trespassed, Smith did not. John violated Smith.

    . . . you realize that this depends on previously established norms and that we were abstracting all norms away when looking at the case, don't you?

    Can you even grasp the discussion being held?

    No, they are not.

    A brilliant counterargument.

    No, the libertarian would be fine with the second case because lol property. Communists are private property advocates as well, they just arbitrarily want no less than two individuals owning land, because that's the only way a "commune" can exist. They too will argue that they are justified in protecting their land against trespassers.

    And what the hell do I have with whatever norms communists like? What I am discussing is norms in general and how the libertarian "non-aggression principle" is a tautology in a high horse. Hell, I am not even arguing whether libertarian norms are "good" or "bad" or if I would like to live in a libertarian world or whatever.

    It doesn't even say that. It says that INITIATING violence is wrong.

    Defending oneself from violence, with violence, is not "coercion." Coercion is an initiation. It is justified to "complain" of coercion.

    Straw man. Initiations of violence is morally wrong, and there are no exceptions.

    can you even understand what i'm trying to say

    i'm trying to say that this is meaningless

    because it depends on previously established norms to define which violence is initiatory and which violence is not

    oh god this is like trying to argue with a fundamentalis--oh right, libertarians.

    No, peaceful cooperation requires rules. It is not the result of rules. Rules that are themselves initiations of violence cannot cause peace. You have it backwards.

    ALL RULES are violence. To speak of "initiation of violence" before speaking of rules is stupid because it is the rule that defines which violence is initiatory and which is not.

    ReplyDelete
  96. part 2

    Huh?

    Yeah, I thought you wouldn't understand.

    But here, here is why stuff like "to each his own" is nonsense: because you have to define what is one's own, and in the concept of what is one's own it is already implicit that it is to be given to one. That is, it is useless as a principle.

    Rothbard would wipe the floor with Ross and Kelsen.

    Rothbard couldn't even understand Kelsen. For the morbidly curious, here is his ~*ABSOLUTELY BRILLIANT*~ criticism of Kelsen in For a New Liberty:

    Kelsen’s answer [to the problem of what morally distinguishes the state from a gang] was simply to say that the decrees of the State are “valid,” and to proceed happily from there, without bothering to define or explain this concept of “validity.”

    That is, Rothbard is arguing that Kelsen is somehow trying to make a moral distinction between the state's commands and that of an armed gang, he is thinking that when Kelsen talks of validity (and he has to be stupid or intellectually dishonest to seriously argue that there is no kelsenian definition of validity, and when it comes to Rothbard I'm never sure of which one it is), Kelsen is speaking of moral validity in the sense that natural law is "valid", a requirement (regarding its content) that law has to meet.

    In fact, one of Kelsen's greatest contributions was pretty much the opposite: a completely amoral, value-free and formal examination of law and the state. When Kelsen distinguishes between the state and an armed gang, his distinction is a purely formal one, not a moral one. Kelsen never said that we "should obey the state" in the sense that we "should be good."

    No, I'm not going to take this man seriously. But you are, which is why I'm not taking you seriously either!

    I know, by the way. I said YOU argued it. Wow.

    You don't, bro. Because you accused LK of using it. And I never made any statements about the world or FRB or whatever. But nice try.

    (I'm pretty sure I'm being trolled. No one can be as ignorant as this fellow. Oh, wait, Rothbard can.)

    ReplyDelete
  97. Lord Keynes, I’m delighted you’ve been reincarnated :)

    Re your claim that the solution to the instability of FRB is “financial regulation” and “preventing either type of bank from causing destabilising asset bubbles”, I think that is too vague: it raises the question as to exactly WHAT changes or regulations should be implemented. You suggest separating commercial from investment banking.

    I don’t see that having much effect. The problem is that rising asset prices makes those assets better collateral, which encourages more lending, which boosts asset prices still further etc etc. That problem plagues every form of banking – commercial, investment, etc.

    A solution, or partial solution is offered by full reserve banking. Under the latter, commercial banks just cannot create new money in a boom: at least the money supply expansions would be more or less constant year on year. That blocks or hinders the “asset price – money creation” spiral. An apparent drawback is that in a boom, short term interest rates would rise faster than we have been used to up to now. But that would be beneficial in that it would discourage speculative borrowing.

    Those with variable rate mortgages would be hit, but then given that the latter are making a long term investment, they are taking a risk choosing variable rate mortgages. They are borrowing short and investing long – sort of: more or less what brought Northern Rock and hundreds of other banks down over the last century. Be it on their own heads.

    ReplyDelete
  98. Ralph Musgrave,

    A solution, or partial solution is offered by full reserve banking. Under the latter, commercial banks just cannot create new money in a boom: at least the money supply expansions would be more or less constant year on year.

    That would severely cripple the ability of a modern capitalist economy to endogenously create the money it needs for sufficent growth, including investment in capital goods.

    As long as regulation controls the flow of new money and what banks do, the pro-cyclical tendencies of the FRB system would be minimised, as would asset price inflation, as in fact what we saw from 1945-1973 in many countries.

    ReplyDelete
  99. Some types of insurance are stable and some are not. The stable type involves common losses of limited magnitude, e.g. auto insurance. The unstable type involves rare, unlimited losses, e.g. earthquakes - or more on point, deposit insurance.

    I don't think there's any inconsistency here. The odd thing is that Rothbard is implicitly accepting a regulatory role for the state. It's an un-libertarian position which is obscured by the "fraud" rhetoric.

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  100. Lord Keynes, Your paragraph which refers to “endogenously creating money” glosses over the basic point at issue here, namely should new money be created by commercial banks or the central bank. I say the latter. Moreover, this would not “cripple” the economy. Reason is that a central bank would be able to expand the money supply at the maximum rate that is consistent with acceptable inflation: not a hundred miles from what central banks do now.

    The only difference would be that borrowers, and their banks, instead of satisfying their borrowing needs wholly or partially by cranking up their own printing press, would have to find lenders willing to meet 100% their needs. The system I favour is the one set out here:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

    Re the regulations which you claim had fractional reserve well under control in 1945-73, what regulations were these? Banks were not so highly leveraged then, which I agree was a help. But lowering leverage is a move towards full reserve.

    ReplyDelete
  101. 1. Interest rate ceilings
    2. Liquidity ratio requirements
    3. Higher bank reserve requirements
    4. Capital Controls (that is, restrictions on capital account transactions)
    5. Restrictions on market entry into the financial sector
    6. Careful inspection of, and controls on, banks' lending standards
    7. Credit ceilings or restrictions on the directions of credit allocation
    8. Separation of commercial from investment (“speculative”) banks
    9. Stopping investment banks from engaging in the activities of commercial banks and vice versa
    10. Government ownership or domination of the banks.

    http://socialdemocracy21stcentury.blogspot.com/2009/11/financial-deregulation-and-origin-of.html

    ReplyDelete
  102. Lord Keynes: Thanks for the info and link.

    ReplyDelete
  103. 1/3

    Anonymous:

    part 1.

    Ah, little Pete, I would really like to think you have initiated yourself in many legal philosophies. I really would, it would make me warm in the inside, because it would mean that there are more knowledgeable people in the world, who would post more interesting things in blogs than libertarian nonsense. But I think it is not the case, because you think Rothbard is a brilliant philosopher.

    Non sequitur. You're fallaciously presuming that having knowledge in legal philosophy ipso facto means one must reject Rothbard. You can't expect people to take that claim on faith. You have to show people via argumentation.

    "Right away you ignore how the ownership came to be."

    How "ownership" came to be is irrelevant in this case because I was looking at the material reality.

    You are thus ignoring the entire foundation of distinguishing between just ownership and unjust ownership. And even if you wanted to only look at the "material reality", then you still could not ignore how ownership came to be, because material reality includes how ownership came to be.

    "How ownership came to be" is a legal relation, it depends on norms, which were explicitly abstracted away because we were examining only the material reality of this case.

    You cannot ignore the norms, because the very claim to own a property is a norm. It is a claim that includes an implicit "ought" about what non-owners and owners should do in relation to that property.

    "Bob trespassed, Smith did not. John violated Smith."

    . . . you realize that this depends on previously established norms and that we were abstracting all norms away when looking at the case, don't you?

    You realize that any argument on just action versus unjust actions, concerning property, necessarily depends on how ownership came to be, and thus previously established norms implicit in your own example, don't you?

    Can you even grasp the discussion being held?

    Can you even grasp your own presumptions?

    "No, they are not."

    A brilliant counterargument.

    "A brilliant counter-argument."

    A brilliant counter-counter-argument.

    No, the libertarian would be fine with the second case because lol property. Communists are private property advocates as well, they just arbitrarily want no less than two individuals owning land, because that's the only way a "commune" can exist. They too will argue that they are justified in protecting their land against trespassers.

    And what the hell do I have with whatever norms communists like?

    Don't feign ignorance on that one.

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  104. Anonymous:

    2/3

    What I am discussing is norms in general and how the libertarian "non-aggression principle" is a tautology in a high horse.

    You haven't shown how it is a tautology.

    "It doesn't even say that. It says that INITIATING violence is wrong."

    "Defending oneself from violence, with violence, is not "coercion." Coercion is an initiation. It is justified to "complain" of coercion."

    can you even understand what i'm trying to say

    Yes. What you are saying is nonsense.

    i'm trying to say that this is meaningless

    It is not meaningless. If it were, you could not even respond to it or say it is wrong.

    because it depends on previously established norms to define which violence is initiatory and which violence is not

    Of course. You yourself could not even use the term "violence" or "initiations of violence", if you did not presume a previous ethic.

    "No, peaceful cooperation requires rules. It is not the result of rules. Rules that are themselves initiations of violence cannot cause peace. You have it backwards."

    ALL RULES are violence.

    To speak of "initiation of violence" before speaking of rules is stupid because it is the rule that defines which violence is initiatory and which is not.

    You could not even conceive of the concept of "rules" and argue your case unless you already presupposed an ethic, which is an ethic that makes argumentation and communication possible.

    Yes, rules can precede an ethic, but that doesn't mean that making a case for it enables you to deny all ethics first, and then find out which ethic follows from which rules. The arguing over rules itself presupposes an ethic.

    part 2

    "Huh?"

    Yeah, I thought you wouldn't understand.

    You, you didn't think that, or else you would not have said it the way you did. What you said made no sense to me.

    But here, here is why stuff like "to each his own" is nonsense: because you have to define what is one's own, and in the concept of what is one's own it is already implicit that it is to be given to one. That is, it is useless as a principle.

    False. In the concept of what is one's own, it is not implicit that it is to be "given" to one. To be given something already implies ownership from he who gave to he who receives. What you think is implicit to something else, is actually already presupposing something implicit, namely, what you think is the thing that carries an implicit presumption!

    No wonder you're hopelessly confused.

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  105. 3/3

    Anonymous:


    Rothbard would wipe the floor with Ross and Kelsen.

    Rothbard couldn't even understand Kelsen.

    Rothbard did understand Kelsen. You just don't understand Rothbard.

    For the morbidly curious, here is his ~*ABSOLUTELY BRILLIANT*~ criticism of Kelsen in For a New Liberty:

    Kelsen’s answer [to the problem of what morally distinguishes the state from a gang] was simply to say that the decrees of the State are “valid,” and to proceed happily from there, without bothering to define or explain this concept of “validity.”

    That is, Rothbard is arguing that Kelsen is somehow trying to make a moral distinction between the state's commands and that of an armed gang, he is thinking that when Kelsen talks of validity (and he has to be stupid or intellectually dishonest to seriously argue that there is no kelsenian definition of validity, and when it comes to Rothbard I'm never sure of which one it is), Kelsen is speaking of moral validity in the sense that natural law is "valid", a requirement (regarding its content) that law has to meet.

    You obviously don't even understand Kelsen, nor Rothbard. Rothbard was correct that Kelsen just ad hoc claimed that the state's laws are "valid" and that the armed gang's laws are not.

    Your lame attempt above doesn't even cut to the heart of Rothbard's criticisms of Kelsen.

    In fact, one of Kelsen's greatest contributions was pretty much the opposite: a completely amoral, value-free and formal examination of law and the state.

    There is no such thing as an amoral law or state.

    When Kelsen distinguishes between the state and an armed gang, his distinction is a purely formal one, not a moral one. Kelsen never said that we "should obey the state" in the sense that we "should be good."

    He never provided an explanation of what he means by "valid". You claim he was referring to natural law, but Rothbard was using natural law to refute Kelsen.

    No, I'm not going to take this man seriously. But you are, which is why I'm not taking you seriously either!

    No, I am not going to take Kelsen seriously. I will take Rothbard seriously.

    "I know, by the way. I said YOU argued it. Wow."

    You don't, bro.

    Yes, I do. I said you argued argued it, not that LK argued it. You said "What LK argued is..." when I was referring to what you argued.

    Because you accused LK of using it.

    No, I accused (correctly) you of using it.

    And I never made any statements about the world or FRB or whatever. But nice try.

    Then it must have been another "Anonymous." Pick a name and avoid confusion.

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  106. You're fallaciously presuming that having knowledge in legal philosophy ipso facto means one must reject Rothbard.

    . . . you realize that I was mocking you rather than attempting to present any serious point in that paragraph, don't you?

    Now I'm asking this without any bit of sarcasm whatsoever, but are you anywhere in the autistic spectrum? because jesus christ man

    And Jesus Christ, I'm not wasting my time with the rest of this discussion, what with the guy arguing that norms are material reality, that someone who claims to be knowledgeable in Kelsen says he never provided a definition of validity (that is, someone who claims to be knowledgeable in Kelsen and who has never read The Pure Theory of Law), that the Kelsenian value-free approach to the study of law means that he thought the content of law or the actions of a state were value-free, I just don't care anymore, the amount of stupid is burning my eyes and I love my eyes, I have got only two of them.

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  107. OK, I might be missing something, but it seems to me that one of the main reasons Pete claims that FRB is fraudulent is that people are misled into thinking that bank will lend out their deposits (he says "If only he was aware that in a recent poll, over 70% of UK residents actually believe that their banks had the money on hand safe and available at all times") Maybe it is the casein the UK, but here in the US banks are required to display "FDIC Member" decals and peole are generally aware that their deposits are insured only up to $250K limit (used to be $100K.) If people were unaware of the risk of not getting their deposits back, they should have been asking would you even need an FDIC insurance. Seems to me that people definitely are aware of the risk involved.
    Additionally, in a fiat system imposing 100% reserves requirement does not solve the problem of credit expansion. That's why you need some MMT knowledge. Since reserves are required for the healthy functioning of the system - they are like blood in our bodies - the Fed has no choice but to accommodate the system's demand for reserves at all times. Banks therefore always extend credit to customers deemed creditworthy and acquire reserves after the fact. With 100% reserves requirement the Fed would still have to supply reserves whenever the system is short thru the overdraft window. If the banking system as a whole wants to extend credit beyond the deposits it has on hand, it would go the discount window and loan those from the Fed. So, we'd be back to the question of what FFR is targeted, and whether the general level of IR is such that prevents credit expansion or not. Reserve requirements are immaterial. Am I missing something?

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  108. With 100% reserves requirement the Fed would still have to supply reserves whenever the system is short thru the overdraft window

    I think you mean a system with no FRB, and only time deposits. Such a system would not need reserves in the FRB sense. Presumbly the anti-FRB libertarians would be happy to see any time deposit bank that could not meet its obligations fail (say, through poor loans). They would not want a central bank.

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  109. Fractional reserve is fraudulent because banks give the impression that depositors’ money is entirely safe, when the reality is that it’s a mathematical certainty that at some point in the history of a bank, it will make a series of silly loans or investments and go bust. And the historical fact is that banks go bust regular as clockwork, credit crunch or no credit crunch.

    And 95% of depositors fall for the “entirely safe” promise.

    In contrast, if banks said something like, “deposit your money with us if you like, but you might lose it” that would not be fraud.

    For a mutual fund / unit trust or corporation to make the promise that banks make is illegal, and quite right. E.g. if the investments made by a mutual fund or unit trust fall Y% in value, then the stake held by those investing in the trust / fund falls by Y%.

    That’s why advocates of full reserve, especially Laurence Kotlikoff, argue that if a depositor wants their bank to lend on or invest their money, then the depositor’s stake in the bank must float in value along with the value of the underlying loans or investments.

    An additional merit of the latter system is that it is impossible for banks to fail, just as it is impossible for mutual funds / unit trusts to fail.

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    1. (1) There can be no fraud in FR banking in the period after the 1930s/1940s in the Western world because either deposit insurance has explicitly protected depositors' money or the central banks give that promise implicitly.

      (2) As to the period before 1930s, perhaps some banks did mislead customers but you need evidence of this, not just declarations without evidence.

      (3) abolition of FR banking would simply cripple the credit markets and investment levels of any modern capitalist economy. You'd make us all poorer by reducing investment and employment levels.

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