Monday, July 16, 2012

Gene Callahan on Fractional Reverse Banking and Gift Certificates

A short, but thoughtful, post here from Gene Callahan criticising Hoppe, Hülsmann, and Block (1998) on their opposition to fractional reserve banking:
Gene Callahan, “If Fractional Reserve Banking Is Fraudulent, Then So Is...,” July 13, 2012.
In short, he notes how what we could call “fractional reserve gift certificating,” a normal business practice, would also be immoral by the logic of Hoppe, Hülsmann, and Block’s argument.


Hoppe, Hans-Hermann, Hülsmann, Jörg Guido and Walter Block. 1998. “Against Fiduciary Media,” Quarterly Journal of Austrian Economics 1.1: 19-50.


  1. Speaking of competing claims on money, suppose you have an interest-earning checking account. Yo u write someone a check for $1000, but he doesn't cash it immediately, and you still continue to earn interest on that $1000 until the check clears. Yet the recipient of that check now owns the $1000. If he waits several months before he deposits the check, shouldn't he also have a claim to the interest on that money it had earned in your account while you still had possession of it?

    1. Mark Plus,

      (1) the recipient of the check does not "own the $1000" until he cashes the check. If the check is negotiable and is used as payment without being cashed, it will of course expand the money supply in the broad sense.

      (2) until recipient of the check cashes it, the check is nothing but a debt/credit instrument: that is, an IOU, a written promise to pay $1000.

      (3) as a debt/credit instrument, the recipient of the check, while he simply holds it, has no claim whatsoever to the interest on the fractional reserve interest-earning checking account. The checking account itself remains a separate debt instrument/asset, a debt owed by the bank (with the promise of interest) to the original depositor.

  2. LK,

    I am confused. The Credit Union I work at I also had direct deposit. When the direct deposit transaction occur at the credit union the following entry was recorded

    Debit Cash
    Credit Members Checking (A liability on the balance sheet of the bank)

    Are you claiming that the credit union owns the contents of the transaction? If so, why is the transaction recorded as a liability on the banks balance sheet and not an asset?

  3. A demand deposit (which I assume you are talking about here) means that

    (1) the money given over by the depositor becomes the property of the bank/Credit Union

    (2) the depositor is now owed a debt - a credit from depositor's perspective, a liability from the bank's perspective.

  4. Yes, but who has ownership of the demand deposit?

    1) Does the bank have ownership, if yes then why is it recorded as a liability and not an asset? An asset implies ownership and future economic benefits.
    2) Does the credit union member own the demand deposit?
    a) The member can withdraw the funds any time without notice and penalty by debit card or ATM machine.
    b) Credit unions are not for profit, in the mission statement of many credits union is the statement that the members own the credit union.

    1. First, in a normal bank:

      the demand deposit as a debt instrument is owned by the bank's client. You are perhaps confused by the word "deposit": the demand "deposit" is not really a deposit is the technically legal sense, but a debt (mutuum) owed. Of course, the demand "deposit" is a liability for the bank: it is a debt owed by the bank.

      In a credit union, assuming that you not referring to ownership shares, as far as I am aware, it is the same (and your (a) statement above implies this).

  5. The entire “FRB is fraudulent” argument is waste of ink, paper and time. The IMPORTANT question is whether FRB on balance brings benefits. If it does, despite being fraudulent under current legislation, that is an argument for amending the legislation, not for outlawing FRB.

    I regularly “steal” stuff from skips. The fact that that activity is theft does not prove it is wrong. If the benefits of allowing people to help themselves to stuff out of skips exceed the costs, disadvantages, etc, that is evidence that the law on theft needs amending. It’s not a good argument for arresting anyone who helps themselves from stuff out of skips.

  6. LK here's a post by Selgin further contributing to this line of discussion:

    Seems like a good addition to whatever list of posts you've no doubt compiled by now!