Austrian economics

Stop the Real Bank Robbery

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That is, the robbery inherent in fractional reserve banking, whereby banks lend out your money while promising to give it all back by the asking. One of the most radical edges of Austrian-libertarian economic thinking, Murray Rothbard's insistance that fractional reserve banking is inherently fraudulent and criminal, gets a sympathetic airing in the Wall Street Journal in the context of an actual proposal before Britain's Parliament to abolish the practice.

Here's the piece, alas subscriber only to read in full, but I excerpt the relevent bits, as written by British Conservative MP Steve Baker:

If you borrow a friend's painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers….

Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank's investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust…..

This skewed relationship between bank deposits and normal contract and property rights, combined with state interventions like the central planning of interest rates and various guarantees, is what causes boom and bust. Today I will be supporting my colleague Douglas Carswell, member of Parliament for Clacton, as he introduces a bill to phase out fractional reserve banking. Our friends in the U.S. and Europe are watching closely, for the same crony capitalism afflicts the world….

Our Regulation of Deposits and Lending bill would allow you, Britons, to choose how your money is used. You would have the choice either to deposit your money for safe-keeping, or to save it for a term to be invested further by the bank. If safe-keeping is your choice, you can have your money back on demand. Your property rights would be intact—you would remain the owner of your deposit. You would probably not earn interest; in fact you may have to pay for the privilege of direct access through branches and cash machines. If, however, you want a yield, you may choose to deposit your money for a term instead. The bank can then invest it further, potentially earning you an income. 

Credit would continue to exist, backed by real savings. The saver would be fully aware of the benefits and risks when choosing between depositing money and saving it for a term…..

The enemies of freedom portray the financial crisis as a failure of capitalism. In reality markets do not grant legal privileges such as fractional reserve banking—politicians do. The legal privilege of fractional reserve banking destroys the sound capitalist mechanisms of property and contract law. Today we hope to end it.

I expect to see the British government abolish the current fractional reserve banking system about as much as I expect Rothbard to arise from the grave to encourage them to do so. Still, an interesting development.

Rothbard's case against fractional reserve banking. Michael Rozeff in Independent Review defends the practice on libertarian grounds as a useful part of truly free banking.

NEXT: You Say You Wanna Devolution?

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  1. A painting is not a fungible asset

    1. ^^^THIS^^^

    2. Really? If I have a Van Gogh, that’s not fungible? Starry, Starry night is probably worth several million. I can liquidate that today, right at Sotheby’s.

      Art is fungible.

      1. Jesus epi, by your logic, everything that can be turned into cash is fungible.

        1. Am I retarded, or is “turned into cash” the definition of fungible? I am fully open to the fact that I am retarded, so that is still an option.

          1. being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.

            So, yes, you are retarded. But acknowledgement is the first step.

            1. You are the only person who I’ll take that from. NutraSweet and Warty? Fuck them.

            2. I will say that you are slightly closer on the gambling v investment than you were on fungible v liquid.

              So, that only puts you at 1.9 retard units in this thread. All of which Im willing to forgive if you hook me up with Phoebe at your “anarchist list” party.

              1. BTW, I knew she was married and had kids (and has 6 years on me), but KEVIN KLINE? Kevin fucking Kline? Really?

                For some reason, I feel like I had a chance, now.

              2. Ms. Klein, upon my request, said “no robc”. I’m sorry. I will also accept an idiot moniker for not getting what “fungible” means. Regardless, I want a Mondrian, a Van Gogh, or a blue period Picasso solely for my personal collection. I know you hate Mondrian, but he is actually talented; look at his early work. The still lifes alone are worth it.

                1. FTR, I never called you an idiot or a retard.

                2. Speaking of early work, how was I not aware of the movie Paradise?

                  Mondrian…off to gis…Oh, I do know who that is. Gah. Good call on me hating that.

                  1. Speaking of early work, how was I not aware of the movie Paradise?

                    I used to respect you.

                    How can you go through life not knowing of Phoebe Cates full-frontal nudity?

                    1. I didnt make it “thru life”. I know it now. If I had a netflix account, would be adding near the top of the queue.

                    2. OK, change can to could.

                      But, you amuse me, so I give you naked Phoebe. NSFW, natch.

                3. Epi,

                  I have this in my dining room. Not the original, unfortunately, not a print either. A painting “influenced” by that. All hail public domain!!!

      2. “I’ll take one art, please!”

        1. “I don’t care what the law says. You’re Thomas Kincades are no good here. See that sign? PAYMENT IN POST-IMPRESSIONISTS ONLY.”

          1. My Pet Coons Likes This.

        2. “What a great impression of a poor person.”

        3. If Epi loaned me his Van Gogh, and I could pay him back with a Monet, it’s fungible. It would get a bit dicey.

      3. You’re confusing fungibility with liquidity, you toad-inserting apeman.

        1. Fuck you. I said I would take it from rob; not you. You never returned my calls, and you didn’t even pay for dinner. You’re like some kind of stereotypical guy.

      4. Do you ever sometimes thing that the entitre notion of Van Gogh (or anyone else’s) painting being worth millions is some sort of elitist conspiracy to create assets via their control of ther media?

        Why does everyone spaz out over Van Gogh, and not an obscure nobody? Because Van Gogh painting are owned by people who have the money and influence to brainwash everyone in raving about them. Because the people who control the art world decide who is an obscure nobody and who is a revered Master. And those decisions are made after said painter is dead, and the art has been purchased by some “wealthy art collector”.
        But said “wealthy art collector” is just a rich guy who can afford to hold a few shows and invite some critics over – this strangly increasing the asset values of the art.

        1. Having stood in front of one or two of Vincents works I can attest that they have a more powerful effect on me than most paintings.

          Once you accept that they “work” better, the cost becomes a function of rarity.

          // For myself, I prefer Gustave Caillebotte to Van Gogh, Monet, Manet and the rest of the usual impressionist suspects.

    3. When rothbard discusses FRB he uses the granaries as an example, because grain is a fungible asset. The argument works out the same, though.

    4. Indeed, paintings are not fungible, but making the article work with reference to grain stores or oil tanks was awkward.

      Good to see coverage here – thank you!

  2. Anti-fractional reserve banking idiots are, well, idiots.

    And that includes Rothbard, at least in this one instance.

    1. We can just inflate our way to prosperity!

    2. Reading you calling Rothbard an idiot makes me angry enough to fly a jumbo jet into a skyscraper.

      According to Justice Steven Breyer, that makes what you said not constitutionally protected, so stop saying it, or else.

    3. What’s the problem? All they’re doing is ensuring that it is an opt-in system.

    4. well gee, doesn’t that just settle it. robc has spoken, folks. no more comments necessary. please move along.

    5. Fractional reserve banking gives an elite clique undeserved (unearned) power in society. That is the practical argument against the practice (unless a person enjoys being an indentured servant to the puppet-masters).

      There is another argument, not very popular in a society secularized to a great extent by the greed of fractional-reserve bankers: it’s cheating.

      From a Anti-Fractional Reserve Idiot

      1. From a Anti-Fractional Reserve Idiot

        Very true!

  3. Its not that bad, really.

    The argument as presented above sort of assumes/implies that the bank has to give you back the very same dollar bills that you deposited with it (hence the analogy to the painting).

    What the bank actually has to do is give you money, from any source, that is equal to what you deposited (plus interest earned, if any).

    As long as the bank can do that, there isn’t any fraud. Its not different than the bank issuing debt, and then loaning out the debt proceeeds, which I don’t think is inherently fraudulent at all.

    If you prohibit fractional reserve banking, what you create is a system where banks are pure depositories who have to charge a fee, rather than pay interest, on your deposits. Putting your money in a bank would mean that you would pay the bank the equivalent of negative interest.

    Nobody would do that. The money supply would contract dramatically, credit would become much harder to obtain, etc. etc. That may all be well and good in the long run, but a larger case needs to be made.

    1. As long as the bank can do that, there isn’t any fraud.

      Actually, even if they cant, it may not be fraud. All contract violations arent fraud.

    2. “If you prohibit fractional reserve banking, what you create is a system where banks are pure depositories who have to charge a fee, rather than pay interest, on your deposits. Putting your money in a bank would mean that you would pay the bank the equivalent of negative interest.”

      This is incorrect. Getting rid of fractional reserve banking would not require banks to charge for deposits. They would only be allowed to loan out money that has been deposited in a term based account such as a CD. This would prevent them from essentially creating money out of thin air. Right now they are only required to carry enough funds on hand to cover 10% of demand deposits.

      1. Getting rid of fractional reserve banking would not require banks to charge for deposits.

        Of course it would. You think they’d take safe-keeping deposits for free as a public service? The entire reason that banks exist is to be able to leverage your deposit.

        1. They would still pay interest for accounts that provided loanable funds. But certainly, things like free checking would certainly disappear.

          1. Who said that free checking would disappear. For example, banks could give 5% interest rate to savers and charge a 12% interest to borrowers while making sure that borrowers were much more credit worthy and that projects that the loan is used for are much more likely to be paid back. They may charge for excessive use of checking accounts, but with technology today, checking can be done cheaply. I could see the government loaning banks money which would increase the amount of money available for credit. Fractional Reserve Banking should be abolished.

      2. Nope. 2%.

      3. Technically, a signed debit card transaction is a charge for a withdrawal. Many banks are relying on such a scheme right now, offering high interest checking if enough signed debit transactions are made each month because the bank charges the retailer for the withdrawal. And the retailers do it because they are junkies and they pass the costs on as higher prices in the store for the items their junkie customers buy.

    3. I saw on TV last night that currently in the US, Banks only have to maintain real assets of 2% So a bank that loans out $1B only needs to have $20M in real assets. I though, that’s like buying stock on margin in pre-1929 America. That’s fucking crazy right there. So some lawmakers want to rais that to 7% by 2019h. Big fucking deal. It sould be at least 20%.

      1. relocate the last h to its proper place.

        1. Okay, but what about the missing e?

          1. You rais a good point.

      2. That’s vastly oversimplified. Capital ratios are determined by the Basel rules. Depending on the perceived riskiness of the asset, the bank needs to hold more or less for each dollar deposited.

    4. But in the article, he clearly states that if you want an on-demand deposit account, you will likely have to pay a fee, whereas if you want to earn interest, you will need to use a term account, allowing the bank to invest your money to earn a return.

      People should be aware that they can have one or the other, but not both. It is fraudulent that a bank promises all its customers with demand deposit accounts that they can have money equal to what they deposited on demand when they do not, in fact, have the ability to do so. The entire lie is then underwritten by the taxpayer via the FDIC, allowing banks to lie without consequence because if the promise is ever tested, the government will bail depositors out.

      The correct and honest system is to allow depositors to choose to accept risk of loss and earn a return, or total safety but with no return – anything else is a market distortion created by the government through banking rules and depository insurance.

        1. -112, there is no reason that the FDIC couldnt be private.

          Then the risk the depositors are taking is in the PDIC (Private Deposit Insurance Company) failing.

          1. +113

            If there’s no reason why it couldn’t be private, than stop the tax payer subsidizing. GSM.

          2. If banks had 100% reserves, then there would be no need for deposit insurance. Bank runs are impossible if the bank actually has 100% of deposits on hand.

            1. Banks wouldn’t exist if they kept 100% of deposits on hand.

              1. You couldn’t be more wrong.

                1. I mean, have any of you people actually read any of the literature on this subject? Banks would still exist, but their role would be altered. They would basically be money services companies as far as demand deposits are concerned, and all of the money that they loan out would come from timed deposits. Still a role for banks to play.

                  1. They would basically be money services companies as far as demand deposits are concerned, and all of the money that they loan out would come from timed deposits. Still a role for banks to play.

                    If a bank has timed deposits then it doesn’t have 100% of deposits on hand.

                    1. They would basically be money services companies as far as demand deposits are concerned, and all of the money that they loan out would come from timed deposits. Still a role for banks to play.

                      If a bank has timed deposits then it doesn’t have 100% of deposits on hand.

              2. Banks wouldn’t exist if they kept 100% of deposits on hand.

                You are confusing loans with double legitimate. The former is perfectly acceptable, as a loan is an asset and not a liability on the books (holding a client’s account is a liability — a debt owed by the bank), whereas, double accounting (a fraudulent transaction) occurs when a bank issues as an asset notes on claims against them.

                1. One word got out of place in the above paragraph. Corrected version.

                  You are confusing loans with double accounting. The former is perfectly legitimate, as a loan is an asset and not a liability on the books (holding a client’s account is a liability — a debt owed by the bank), whereas, double accounting (a fraudulent transaction) occurs when a bank issues as an asset notes on claims against them.

                  1. Also, note that these are the rules that we venture capitalist follow and live with every day so the question some of you have how can the economy remain dynamic without fractional (split value) reserves is in reality mute. Banks don’t only transact between owners (seems to be an assumption in some of your arguments), they also own properties for which their balances are called against. I’m afraid congress is pushing and has already pushed VC into the same devil’s bargain that most of the financial industry has been captive to for the past hundred years. It is going to prove detrimental in the long run specifically because it replaces sound finance with arbitrary politicized schemes.

                  2. You are confusing loans with double legitimate.

                    See comment above yours.

      1. And they pay a fee to the FDIC for this insurance.

      2. What if my bank account were to work exactly like it does now, but the contract explicitly said that it wasn’t a demand deposit, it was just a “best effort at simulating demand deposit”. Would that be fraud?

        1. Wow, you’re actually describing real life! Most modern banking accounts, as well as many historical bank notes, did not specify “on demand”.

          This whole Rothbardian full gold reserve movement is based on a straw man.

          1. However, that is what most people don’t realize. Most people are not aware of the real risks of fractional reserve banking. FDIC insurance is an illusion. There isn’t nearly enough to back the insured deposits to even come close to qualifying as insurance.

            1. Are you kidding. They just print more.

        2. The only way to that, considering that only a fraction of the money deposited is available at any given time, is on a first come-first served basis and anyone coming after the money runs out can wait for some loans to be paid back, hope for the FDIC to step in, or get screwed. Doesn’t that sort of system encourage the kind of panic mentality that causes runs?

          You could, however, have a hybrid account, where a certain percentage of the money deposited would be loaned out and unavailable for a while, and the proceeds would be used to offset the storage costs for the remainder.

          1. They don’t have to wait for loans to be paid back, they can just sell them(from the perspective of the bank, the mortgages and other loans they hold are assets).
            Bank runs have often led to a temporary suspension of reedemptions while they scramble to liquidate assets to come up with the money. If they’re truly insolvent and have been hiding this fact, they will not recover; if they’re not insolvent, the bank-run will eventually abate and trust will be reestablished in the bank.

            The problem with fractional reserve banking has nothing to do with fraud, that requires an act of misrepresentation, the problem is the amount of leverage the banks take on.

            When things are going fine ~30:1 leverage as held by Bear-sterns, Lehman, Freddie, Fannie etc. is just great, you make a tonne of money. When things aren’t going so well leverage is terrible; with 30:1 leverage all it takes is a 3.3% loss on your investments to make you insolvent.

    5. But a bank can only guarantee your money (+ agreed interest – agreed fees) back to you because the FDIC insurance.

      It’s all back to playing field that ISN’T level or free.

      1. The FDIC could exist without government backing. The banks would have to pay a bit more for the insurance (hell, they would actually have to pay, unlike some instances with FDIC) but thats fine by me.

        1. Then it should be a marketing tool. “Our bank is insured with the FDIC” not a fine print guarantee that all banks have. I also think, however, that banks should try offering these “safety deposit box” types of accounts for fees and advertise that your money will never be lent out, just kept safe for you… I wonder who would sign up for that?

          So, for the record, I’m cool if they want to insure themselves without the gov’t and the taxpayer to bail them out- I have no problem with the current banking system if they do that.

          1. Thats all Im saying. Im not saying the current system is right. My issue is with people who oppose fractional reserve banking. Opposing government backed FDIC is perfectly fine.

          2. It was a marketing tool before the bailouts. MMAs weren’t FDIC guaranteed and many banks used FDIC guarantee to try to lure MMA holders to their savings accounts.

          3. What do you think “Member FDIC” on your bank’s window is? There are bank-like entities, usually high yield checking accounts that put money in money markets, that are not FDIC insured entities.

        2. And then who insures the private FDIC equivalent? If you’re worried about the FDIC being incapable of dealing with a shit-hits-the-fan series of bank runs (which you should be), then any private company is going to have the same problem.

    6. What the bank actually has to do is give you money, from any source, that is equal to what you deposited (plus interest earned, if any).

      As long as the bank can do that, there isn’t any fraud.

      That is totally dependent on TIME.

      Try to withdraw $75,000 in cash from a demand deposit account and see how long it takes. Many banks simply don’t have that kind of cash on hand in the facility. I think the law allows 3 business days, but there’s the law changing the definition of “on demand” again.

      In practice, it will probably take several hours to withdraw $75,000 in currency from a demand account. And you will probably have the FBI tracking your terrorist ass as a bonus.

      When Indymac was closed, the FDIC gave the depositors checks, not cash. And when they took these checks to other banks, the banks put a 30-day hold on them. So FDIC insurance has little to do with the subject.

  4. If I loan a friend a painting, with the understanding that he is going to loan the painting out for profit, then no fraud has been committed.

    Really, What the Fuck?

    1. Except for when you and 1000 of your friends (who also loaned out their paintings) demand your painting back and the friend doesn’t have it.

    2. If I loan a friend a painting

      As in portraits of dead presidents?

  5. As much as fractional reserve banking is hypothetically bullshit, without it we wouldn’t have modern banking. Do you really want to keep all your money under your bed? Yes, they can’t pay everyone if everyone comes asking for their money. But this is the risk you take if you…don’t want to keep all your money under your bed. Shit, as far as I’m concerned, stocks are gambling; why can’t banking be as well?

    1. Not everything with risk is gambling, but that is a semantic issue.

      1. Really, rob? If you put money into BP (get it while it’s hot), you’re not gambling?

        I am not down on the stock market, but let’s be serious: it’s gambling. And I hate gambling.

        1. No, you are buying an ownership position in BP.

          1. You’re buying a gamble. Like betting on 33. Sorry, I’m really down on stocks.

            1. I’m right there with you. I no longer believe in Buy and Hold either. It may not be technically gambling, but it sure doesn’t seem like a reasonable way anymore to protect your wealth.

            2. No risk, no reward. What’s not to like?

    2. I get the sense that under your mattress is precisely what a lot of goldbugs want.

      1. You might consider me a gold bug, but that is not what I want at all. All of you pro fractional reserve banking people have yet to make a decent argument.

        1. Let me guess, you want all the benefits of the existing banking system with none of the ambiguities and risks that make that system possible.

          There’s a saying about cake that describes that desire.

          1. What are the “benefits” of the current banking system? Their is nothing ambiguous about the current banking system. It does exactly what it can be expected to do. Illogical risks don’t make anybody stronger.

            In the absence of fractional reserve banking and central banking, the interest rate will reflect the real time preference. People will still be able to obtain money for various projects, they just won’t be able to use inflated credit to bankroll things that ignore the time preference.

          2. There’s a saying about cake that describes that desire.

            Actually that saying would more accurately apply to FRB – as in loan the money out and have it, too.

      2. Yet another thing goldbugs and bedbugs have in common.

        1. Oh man, you called us “goldbugs!” That is, like, so witty.

  6. Yeah! And let’s get rid of those infernal combustion engines! They scare the hell out of my buggy horses.

  7. Everything you need to know about banking was in “It’s a wonderful life”.

    1. They got crows and squirrels running around loose in them?

  8. Fractional reserve banking isn’t the problem. Its that its the only game in town by design.

    1. It’s a monopoly control over the money supply that is the problem. If there were a free market in money, full reserve banks couldn’t compete. Which is why so many goldbugs want the government to impose a gold standard. Even anarchist Rothbard wanted the government to make a transition to a gold standard. Did he think the state would wither away or something?

      1. Are you crazy? Have you ever actually read any Rothbard? Rothbard makes a pretty good argument that under a truly free banking system, 100 percent reserves would be the natural order. Any bank that had reserves lower than 100 percent would be constantly threatened by bank runs. The only reason that fractional reserve banking ever occurred in the pre central banking era was due to the lack of real banking competition. The more banks that you have competing and demanding gold from eachother to cover checks and bank notes the more likely the banks are to hold adequate reserves. Government and banking cartels got together to make sure that competition didn’t make that happen.

        1. Any bank that had reserves lower than 100 percent would be constantly threatened by bank runs.

          That makes no sense. The whole idea of fractional reserve banking came about because bankers noticed that nowhere near 100% of their depositors came by to withdraw their cash at any one time.

          See no reason to consider the whole scheme fraudulent as long as it’s all disclosed to the depositor.

          1. I never said that it was “fraudulent.”

            It makes perfect sense. Under a true free banking system, the constant act of redemption from bank to bank would make keeping reserves below 100% more and more dangerous. Sure, banks would probably allow their reserves to fall below 100% under free banking, but anytime a bank had any trouble meeting the redemption demands of banks who are receiving checks from their customers, the chance of a bank run would skyrocket.

            1. It’s not clear whether the redemption demands from other banks would require 100% reserves, or only 90%, or only 80%, or … 20% or 10% or whatever.

        2. 18th century Scotland had free-est banking system in modern history; the free market choose fractional reserve banking with a ~2% reserves.

          1. I wouldn’t call the old scottish system “the freest banking system ever,” but yes it had problems. The main problem that they had was the creation of the “optional clause” that allowed banks to delay redemption of specie for months. This is exactly the problem that “goldbugs” have highlighted. Making redemption in specie difficult or impossible makes the banks less honest.

            Sure, this situation occurred under a more or less free banking system. Nobody is arguing that free banks won’t make mistakes. The “optional clause” was created by a collection of private banks who in this case were acting as a banking cartel. The modern banking system doesn’t solve this cartel problem, it reinforces it. Rothbard noted the fact that free banking doesn’t prevent banks from acting in a shaky manner, but he also pointed out how government action is usually more of a reinforcement of the problem than the solution.

          2. You are also ignoring the fact that during this supposed period of scottish free banking, their were really only two major banks that were violently trying to undermine eachother. The creation of the optional clause was a direct result of the feud between the two Scottish banks of the time. Under true free banking, banking is supposed to be international and ubiquitous, with nobody requiring a government blessing to form a bank. This increased competition would make such occurrences of 18th century Scottish banking impossible.

            1. You clearly know no fucking thing about the scottish system, including the number and size of banks, note wars, so forth. Instead of bsing why not read Free Banking in Britain instead?

              1. The two major scottish banks of the 18th century were formed via government charter.

              2. “specie reserves held by the Scottish banks had
                averaged from 10 to 20 percent in the second half of the eighteenth century,
                but then had dropped sharply to a range of less than 1 to 3 percent in the
                first half of the nineteenth.” (The reserve ratios plummeted after the Bank of England and the Scottish banks both suspended specie repayment.)

                From “The Myth of Free Banking in Scotland” by Murray Rothbard.

  9. I don’t think that is an accurate description of what is going on. FRB is where the bank creates money out of thin air based on how much “real” money they have on deposit. If you deposit 100 dollars in a bank they add 1,000 dollars to their books and loan out the extra 900. So they aren’t loaning out your “real” deposits they are loaning out “created” money.

    1. Bank accounting is counter-intuitive. Deposits are liabilities to a bank (as money they owe back to the depositor). Loans are assets to a bank (as money the borrower owes them).

      If you say that a bank can’t make loans that exceed its deposits, you are saying that it can’t have assets that exceed its liabilities. IOW, you aren’t guaranteeing solvency, you are guaranteeing its opposite.

      The problem banks have is worst-case liquidity – the proverbial run on the bank, where the bank doesn’t have enough liquid assets to pay out all its depositors at once. This isn’t a fractional reserve problem; this is a problem with any bank that loans out any amount of the money on deposit with it.

      1. IceTrey is simplifying a bit. A bank can’t immediately loan out $900 based on a $100 deposit. They can loan out $90, but then find that someone redeposits that $90, allowing them to loan out another $81, etc.; eventually there’s $100 of currency in the bank’s reserves, they have $900 in outstanding loans, and they have $1000 in total deposits.

        R C Dean’s second paragraph is outright wrong: note that the bank in the above scenario has $1000 in deposits, which is not exceeded by its $900 in loans, and yet the bank is still (just barely, unless those loans pay interest) solvent.

        1. No, you are wrong (a little). The 900 in loans is only 900 in principal, a bank books the expected interest from the loans as an asset, too. So their assets are probably over 1000 dollars. Maybe 1200 depending on the terms of the loans. They wouldn’t be loaning the money without interest unless it was a deflationary environment, it which case the liabilities would be written down as well (generally taken as income from deposit fees).

          If the bank were to sell the loans to another party, they might get anywhere from 950-1050 for the accounts receivable. If they get less than 1000, they are technically insolvent. But they can borrow money to stay afloat.

          But who would loan them money below market rates? Well, there’s a taxpayer born every minute.

  10. I’ve never had a bank account that charges fees. I never go to ATMs that would charge me a fee. I’m not sure how much I’d be willing to pay for the services my bank provides (check cashing, check writing and ATM access primarily), but it’s not much.

    Eliminating fractional reserve would shift a lot of funds to money market accounts which would still offer all of that for free with minimal risk to assets.

    1. The fee you are charged is in the form of rate of interest that is below the rate of inflation.

  11. anti-fractional reserve banking is the tip of the iceberg in terms of libertarian super-nerdo douche trying-to-be-as-logically-exact-as-possible

    It’s one of the less crazy libertarian positions out there

    1. It’s one of the less crazy libertarian positions out there

      I would argue that it isn’t even a libertarian position.

      I don’t agree with it…any libertarians out there that do?

      To be honest it sounds more left wing then libertarian….but only slightly.

      It sounds closer to stupid then anything.

      1. No problem with FRB at all. Now FRB on a 2% margin?

        1. Why have any margin?

    2. It’s one of the crazier ideas! It’s financial nuttery. It’s on the level of Marx’s “profit is exploitation” nuttiness.

      1. People always say that until they actually study the subject.

        1. The typical logic is this: I am comfortable with modern banking. Therefore there isn’t any fraud in it.

  12. Everyone understands that their money is being loaned out. In return you earn interest.

    How can it be fraud if you are fully aware of this?

    1. It’s not. Which is one reason why we don’t need a law against it.

    2. It’s fraud because you are allowed at any time to withdraw your money from the bank. If a stipulation existed to where you couldn’t get your money until the borrower paid the loan off with interest, then no fraud exists. However, if you deposit $10,000 of your money on Tuesday, the bank holds $1000 in reserve and loans out $9000. If you decide to withdraw your $10,000 on Wednesday, the bank gives your money back without calling the loan from the borrower. There is now $19,000 in circulation although you only deposited $10,000.

      1. It’s fraud because you are allowed at any time to withdraw your money from the bank.

        Fraud committed on who? Who is deceived? Who is the deceiver? The state? the public? the depositor? the bank?

        Fraud is not a vice…in order to be fraud you have to have a victim and a perpetrator. In the case of depositing and withdrawing from the bank you have neither.

        1. Do you not understand that the bank has created $9000 out of thin air?

          Maybe gold is a better example: Say I deposit 10 oz of gold into the bank. The bank holds 1 oz in reserve and loans out 9 oz to you. I come to withdraw my 10 oz. The gov’t can’t print out gold to make me go away. What happens now? There are two people with rights to a total of 19 oz, although there are only 10 physical oz. The bank has promised assets that it does not have. This is fraud.

          1. But it’s not fraud if you know what’s going on, regardless of how the bank’s promises are couched.

          2. Before the Federal Reserve printed currency (via the Bureau of Engraving and Printing) most bank notes in circulation were literally printed by the banks themselves. (Treasury notes also circulated, but they were less common.) The Fed has taken over this function, but essentially the operation is exactly the same. There used to be publications called Bank Note Reporters that published data on the likely par value of the currency printed by a particular bank. Few notes ever redeemed at par, there was usually a 2% reduction at best, 5-10% was typical, 85% in the extreme.

            Today we call this inflation. We’re all so blissfully unaware of the safety our central planners have provided.

          3. What happens now?

            The PDIC sends me 9 ozes of gold.

            1. The PDIC doesn’t exist. And if they did, it wouldn’t matter as they can’t print gold.

              1. The PDIC doesn’t exist

                Hypothetical questions get responded to with hypothetical answers.

            2. Can there be a run on the insurance company?

          4. That bank has an obligation to pay your your gold, but it is not a absolutist pay me instantly or I get to legally kill you sort of obligation. There are terms to it. Go read your fucking contract.

            What? You didn’t read your contract? You just assumed your bank operated in the hyper-simplistic fashion Rothbard described? My sympathy and a dollar will buy you a cup of coffee.

            1. Used to take only a dime for that cup of coffee. Explain that, fucker.

            2. + a whole lot.

            3. The problem is not being aware of the contracts terms or not.

              The problem is a fractional bank CAN NOT honor all of its contracts.

              And this not about some banks being managed badly or not, it is inherent in fractional reserve banking.

              1. Except that they can and do. My bank always did in 10 years.

      2. That would all be true if the only customers the bank had were you and the borrower. They don’t create $9,000 out of thin air, they just borrow it from other accounts.

      3. “However, if you deposit $10,000 of your money on Tuesday, the bank holds $1000 in reserve and loans out $9000.”

        Are you sure they don’t hold the entire $10 thousand in reserve and make loans totaling $90 thousand?

      4. If a stipulation existed to where you couldn’t get your money until the borrower paid the loan off with interest, then no fraud exists.

        That would be a little weird, since your money is not tied one-to-one to any specific loan.

        However, the bank could stipulate that you have to give them some advance notice that you are going to make a large withdrawal. I believe such stipulations are not unheard of. It’s not unlike the settlement period required before getting the cash from a stock sale.

  13. Maybe I’ve been guilty of reading Rothabard generously because I like agreeing with him. But I’ve never been convinced he was quite as hard core on this FRB as he is generally thought to be. I’ve always seen him as walking right up to that line, but not quite crossing. Sure FRB as practiced is wrong, but that’s because it has goverment backing. And if people really don’t understand FRB, then it could be described as fraud. But can anybody point me to reference where Rothbard explicitly calls FRB fraudlent, as a thing in and of itself?

    1. I’ll read the LRC link and see if I think Rothbard “crosses the line there”.

    2. From the Rothbard piece linked to in last sentence of post: “banks have habitually created warehouse receipts (originally bank notes and now deposits) out of thin air. Essentially, they are counterfeiters of fake warehouse-receipts to cash or standard money, which circulate as if they were genuine, fullybacked notes or checking accounts. Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term “fractional-reserve banking,” which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem.

      1. Ya that looks like the closest he comes to me. But I wouldn’t call that paragraph incompatible with the notion that as long as the depositor understands what is giong on, it’s not fraudlent. Clearly he doesn’t like the setup, but the imaginary Rothbard in my head could still admit that some form of dececption is necessary for something to be called fraud.

        This is in contrast to that DeSoto guy. He goes full retard in my book.

      2. I once asked Murray if he kept his money in a fractional reserve bank. He gave that famous Rothbard giggle/chortle and said “Of Course.”

        1. good one.

          I’d say that “revealed preferences” + “axiom of human action” + “him putting his money in a bank” = he didn’t consider it fraud.

      3. All money is created out of thin air.

        It seems to me his argument is with money not with banks. Or maybe his argument is with money created by non-governmental entities.

        Who knows and who cares. Fundamentally the argument seems to focus on how money is evil and at best could be described as proto-marxist.

        1. All money is created out of thin air. False. See gold,wampum,cowry shells, cigarettes in prison.

          It seems to me his argument is with money not with banks. Or maybe his argument is with money created by non-governmental entities.

          No. His problem is that government is involved at all. It may or may not be insane or wrong. But it isn’t marxist or about “the evil of money”.

          1. crap. close italics

        2. Also let me add : I’m trying to mount a defense of Rothbard, by saying he has been ever-so-slightly strawmanned. I’m not tying to defend people in this thread actually defending the strawman arguments.

        3. You might call it ‘the material fallacy’: a stubborn belief that money is a thing in itself with intrinsic worth rather than a medium of exchange.

      4. If you don’t read the contract, it’s not fraud by the bank, it’s negligence by the depositor.

        1. So if there are fraudulent terms in a contract but I don’t read (or understand) them as fraud because I signed it, it is sacrosanct and there can never be fraud. Got it.

          1. Fraudulent term cannot exist.

  14. “I expect to see the British government abolish the current fractional reserve banking system about as much as I expect Rothbard to arise from the grave to encourage them to do so.

    And I expect Reason staff and readers to stop using the current fractional reserve banking system about as much as I expect Rothbard to arise from the grave to encourage them to do so.

    Oh, and, by the way, “Reason,” I don’t “submit”. I command!

    1. Back to your cage, Vanneman.

  15. So when I borrow money, not currently having the money to pay it back but expecting to earn it in the future (with a small possibility I won’t be able to earn it), I’m committing fraud?

    This whole argument makes no sense.

  16. This is easily resolvable if the depositor agrees to a contract in which he authorizes the bank to lend money and recieve interest in exchange.

    I’d gladly go back to the days when banks paid interest on deposits. It wqould certainly encourage savings.

    1. Also, add some clause to the contract, where the depositor agrees that he cannot withdraw more than X percent of the account per day, or some dollar amount.

      1. I suspect if you read your depositary agreement with your bank, it says something like this. Probably in a lot of legalese. Usually savings accounts say you have to wait 3 days or something to get your money, even though they don’t usually enforce that rule.

  17. One of the most radical edges of Austrian-libertarian economic thinking, Murray Rothbard’s insistance that fractional reserve banking is inherently fraudulent and criminal

    One of the The best parts of being a libertarian is that you can admit you are wrong without worry of upsetting some political machine.

    The idea that banks loaning money is fraud is wrong.

    1. Loaning money is not the problem. Creating money out of thin air is.

      1. Creating money out of thin air is.

        Why?

        And if money does not come out of thin air then what tree grows it or what mine produces it or what factory assembles it or what ocean is it fished from or what construction company builds it?

        1. Then why is counterfeiting illegal? Let’s just print our way to prosperity!

          1. Duplicating another banks notes and passing them off as belonging to that other bank, that is counterfeiting.

            But if you want to issue your own daveb notes, go right ahead. Good luck getting them accepted, but you would be free to do so in a voluntary society.

        2. Creating money out of thin air is.

          Why?

          For the same reason as check kiting and/or writing a hot check are wrong. Not only wrong, but illegal for anyone but banks.

    2. The idea that banks loaning money is fraud is wrong.

      The idea that loaning money can never be fraudulent is wrong.

  18. Too bad, Murray Rothbard. In Libertopia you can’t stop fractional reserve banking.

    When you put money into a checking account, you are lending it to the bank. The bank then lends that money to someone else. That’s it. It’s not that complicated.

    You can’t make it illegal in Libertopia for me to borrow money from one person and lend it to another. You can’t even require me to have capital reserves. I just get to DO IT, and caveat emptor, baby. You have to judge my creditworthiness as a borrower the way you’d just anybody else.

    You can’t shut down fractional reserve banking in Libertopia any more than you can stop me from using my credit card to get a cash advance and then turn around and lend that money to my cousin.

    “But you’re creating money out of thin air!” Oh well. If somebody lends me money and I lend it to someone else, sure, both my creditor and my debtor feel like they “have” money. Welcome to the distributed labor economy, boys. Welcome to the wonderful world of currency.

    Gold bugs act like this is somehow a feature of paper currencies, and it’s not. Fractional reserve banking is a feature of metals-currency economies too. It’s an automatic feature of any system of free economic exchange. As long as there is anyone out there who appears to be a good enough credit risk for me to lend them money which they then intermediate and lend out to someone else, VOILA – fractional reserve banking, boys. It exists as soon as I perceive someone else to be a good credit risk. And in Libertopia, you don’t get to tell me I can’t do that – you don’t get to stop me from being a depositor, a banker, or a borrower.

    1. well said.

      helps me get a little more specific in my quasi-defense of Rothbard too. Rothbard definitely doesn’t like the system we have now. But I don’t recall him ever advocating stepping in and preventing two consenting adults from making a fractional reserve loan in the privacy of their own bedroom. He focuses on stopping the goverment from propping up, subsidizing, and benefitting from fractional reserve networks in place. He might even go so far as to say that FRB wouldn’t be practiced much at all with out government help, but that is merely a prediction, not a normative statement.

      1. Actually he said that those two people in their bedroom are committing fraud against the entire society by altering the value of the banknotes in their wallets. Go read him again.

        1. Do you mean go read the LRC article? Cause I don’t see that in there.

    2. stop making so much sense. actually no I kind of like it. let’s see if I understand.

      Money is created through credit. So as long as people can loan money, money is somehow created. And some entities can loan more money than they have. It makes so much sense.

    3. Until there’s a run on your bank. No FDIC in Libertopia. Banks with 100% reserves don’t need deposit insurance.

      1. Banks with 100% reserves don’t loan money so they don’t generate income so they wouldn’t exist. Your ideal “bank” is a self-storage unit with armed guards.

        1. Remind us again how banking existed before the advent of the Federal Reserve and FRB laws?

          1. As I thought Fluffy made clear, neither the Fed or any special FRB laws are required for FRB to exist.

            1. Fluffy’s example is stupid because he/she doesn’t get it. Borrowing money from a person or a credit card and then loaning that back out is neither fraudulent nor fractional reserve. There is still only X amount of money in circulation. If Fluffy’s depositors want their money and Fluffy doesn’t have it, then Fluffy gets to shop for new kneecaps on ebay.

              Fractional reserve banking exists if Fluffy borrows $10,000 from a credit card, loans $9,000 back out, and then creates $10,000 from thin air to pay the credit card company back. This would not be possible in a true free market, only the Fed and FRB laws can allow this to happen.

              1. No. That’s not what FRB is. FRB is the process of loaning out deposits while keeping only a fraction of it in reserve to satisfy depositor demands. There is no “thin air”.

                You’re confusing FRB with the process of how the Fed manages its balance sheet. Totally different concepts.

                1. You haven’t the slightest idea of how FRB works. You deposit $10,000 in your bank. They turn around and loan it to me. You come in the next day to withdraw your $10,000. Instead of calling the loan made to me, the bank creates $10,000 out of thin air and gives it to you.

                  With a 10% reserve requirement, if a bank gets a $100 deposit and sends $10 to the central bank as a reserve, it can legally lend $90. When the borrower spends this $90, the receiving bank sets aside $9 and lends $81. The initial $100 deposit leads to $900(!) in new money, if banks lend all of the money they are legally allowed to lend. THAT is FRB. The ability to counterfeit at will and devalue the currency. FRB punishes savers and is one of the causes of the boom/bust cycle.

                  The only reason it ‘works’ is that the bank knows that only a small amount of people per day want to withdraw their entire accounts. If everyone decided to withdraw all of their money on the same day, a bank run would occur, because the bank is inherently insolvent and can only pay out to the people at the front of the line. This is the sole reason why the FDIC exists.

                  1. Instead of calling the loan made to me, the bank creates $10,000 out of thin air and gives it to you.

                    That does not happen. What happens is that they pay you out of their reserves. The reserves are not held at the central bank. The reserves are kept by the bank itself. The central bank simply mandates the reserve ratio. If the withdrawal requests exceed reserves, then you are in a situation where a run has occurred.

                    There is no “thin air”, except in the case of the Federal Reserve. But how the Federal Reserve operates is not a requirement for an FRB system. You could shut down the Federal Reserve and still have FRB.

              2. No, the 10,000 isn’t created from thin air. There’s where you go wrong.

                There’s a time function involved, as Invisible Finger pointed out. If everybody shows up at the same time and asks for their money back, the bank is screwed. But people rarely do that, and there’s more than one depositor and one lender involved.

                Banks are time-shifting money, not creating it out of thin air.

                1. How can you time shift assets that don’t exist? The banking system issues multiple IOUs to depositors and borrowers, yet these IOUs are based on the same initial deposits.

                2. Dave b. is right.

                  1. No, he’s not. He’s combining the concepts of the money multiplier with the Federal Reserve balance sheet. They are independent. FRB can exist without laws and without the Federal Reserve. The only “thin air” is the money multiplier result from extending credit. But in an FRB system, withdrawals must still be satisfied on demand with actual assets drawn from the bank’s reserves. They cannot create money.

                    1. You really need to look up the definition of fractional reserve banking and how it works. The banks cannot satisfy withdrawals using non-existent assets.

                    2. They exists. That’s what reserves are. The assets kept on hand to satisfy withdrawals.

                    3. The reserve is TEN PERCENT!!! Where does the other 90% come from?

                    4. The reserve is TEN PERCENT!!! Where does the other 90% come from?

                      If withdrawals exceed the reserves, then they close the doors and say FU. They don’t create money out of thin air.

                      Yes, that is the underlying risk of an FRB system.

                      I simply don’t see why you believe that if a FRB bank gets withdrawal requests for 100% of their deposits, that they will print money and go merrily along. This doesn’t happen. They close.

                    5. Instead of calling the loan made to me, the bank creates $10,000 out of thin air and gives it to you.

                      It is illegal for anybody other than the Treasury to create coins and banknotes, you moron.

                    6. Banks do not create coins and banknotes, and no one said they do, genius. What they create are entries in an electronic ledger. If they run out of actual currency to hand out, they order some from the local Federal Reserve Branch.

                3. There’s a time function involved, as Invisible Finger pointed out. If everybody shows up at the same time and asks for their money back, the bank is screwed. But people rarely do that, and there’s more than one depositor and one lender involved.

                  Banks are time-shifting money, not creating it out of thin air.

                  Yes and no.

                  The time shift isn’t fraud, but banks often find themselves short of funds – it’s not a rare occurrence as you say.

                  But they take care of that short-term liquidity problem by borrowing money from the Fed. At below-market interest rates.

                  Now, how can Fed afford to loan money at below-market rates? Is the Fed some sort of benevolent society?

      2. The PDIC exists in libertopia. And Im not banking at any banks without a PDIC seal of approval.

        And Im carefully watching the PDIC’s financial statements.

        1. You’re funny. The real FDIC is just as insolvent as the banks it claims to protect. It exists only due to the fact that the government knows that all banks under an FRB system are inherently insolvent.

        2. …and who insures the PDIC?

          I seriously doubt your PDIC is going to have anything remotely near enough money in reserve to cover a truly bad cascade of bank runs.

          1. No insurance system can handle massive catastrophic failure. There’s always a point at which the insurer’s assets would become totally depleted. That doesn’t mean that insurance is pointless.

          2. …and who insures the PDIC?

            General Re.

            1. And if B-H goes under, we are all fucked.

      3. Deposit insurance would most certainly exist in Libertopia. the Bank of Fluffy can post “Member MoDIC” on his window*.

        * For a nominal fee of course.

        1. If that were the case, private insurance would exist now. No private company is stupid enough to insure an insolvent institution, and that won’t change in Libertopia.

          1. dave,

            You have been right up to now. The reason a private bank insurance company doesn’t exist right now is the FDIC can undercut them on the price. We’re stating to see the FHA undercut private mortgage insurers now – the privates existed because they would insure loans the FHA wouldn’t touch before. Now that the FHA is covering any shit that comes their way, the privates are drying up.

          2. No, no private company is dumb enough to compete with an organization that can lose money indefinitely without going out of business.

            Why do you think nobody offers private flood insurance? Because there’s no market for it? Or because the fed undercuts you by pricing politically, not rationally?

          3. Private insurance does exist. Today.

    4. “Gold bugs act like this is somehow a feature of paper currencies, and it’s not. Fractional reserve banking is a feature of metals-currency economies too. It’s an automatic feature of any system of free economic exchange. ”

      I completely agree, but that’s not the point. The point is that backing a currency with something of real value is a superior method of encouraging banks to be responsible. Also, all fiat paper simply has value derived from the government threat of force. Throughout history, government have used force to back up their fiat currencies. No fiat currency could exist without the backing of the state.

      1. Yup. Even going back to ancient China, who practically invented fiat currency and inflation.

    5. So, you open a checking account at KFC bank. You deposit $100,000.00 cash the day that you open the account. Several days later, you go to the bank to withdraw $50,000.00 and you are told that the bank can not give you all of the money as it does not have it and that you would have to wait for two business days.

      Should you call the police? After all, you did not sign any contract under the terms of which the bank reserved the right to refuse to give you all of the money you had in your checking account.

      Moreover, let us say that KFC bank promotes itself as “the bank that will alwasys have your money when you want it”.

      Fraud?

      1. Should you call the police? After all, you did not sign any contract…

        YES YOU DID SIGN A CONTRACT!!!!

        Bunch of fumbducks.

        1. Does the standard deposit agreement specifically set forth that the bank reserves the right to refuse to give you the entirety of your deposited money any time you request it?

          1. I believe that is usually the case, yes. If you’re requesting an unusually large amount of cash ($50,000 certainly qualifies), then yeah, you’re probably going to have to wait a day or two for the whole amount.

      2. Sorry sir, we don’t have any Extra Tasty Crispy or Original Recipe money left. We can’t refund your money because we have a policy against doing that, but we can give you some Dumpster Diving Special instead.

        1. Do you know who I am?! You’re under arrest – respect my authoritah!

    6. You can’t shut down fractional reserve banking in Libertopia any more than you can stop me from using my credit card to get a cash advance and then turn around and lend that money to my cousin.

      You hit the nail on the head! In a very real sense credit is money. The minute I make a loan I have created money out of thin air. This is not intuitive, which is why so many people think something fraudulent has happened.

      1. As long as there is no central bank, no state coercion employed to cartelize banking and no coerced pooling of risk, fractional reserve banking does not offend libertarianism.

      2. For the 10 trillionth time, getting a cash advance and loaning it out is neither fractional reserve banking nor is it creating money out of thin air.

    7. “When you put money into a checking account, you are lending it to the bank.”

      So, it’s a loan where
      1) you don’t negotiate any interest rate
      2) the bank doesn’t pay back the principle over a schedule
      3) but you can arbitrarily demand any portion of the principle back whenever you feel like it and have it returned to you, so long as the bank is capable of doing so
      4) it’s called “deposit” instead of “loan”.

      That’s… interesting.

    8. I can’t stop you from doing it, but that doesn’t mean you will be successful. Just wait till everyone wants to claim their demand deposits and watch you collapse in stupidity.

    9. “When you put money into a checking account, you are lending it to the bank.”

      No you are not. “Lending” means giving up the property for a cretain time. If you lend something it is not yours for that specific moment. When you landlord lends you a house, he can not come in whenever he pleases and use the house. The house is yours for the period of the lease.

      A customer lends the money to the bank when he puts the money in a time deposit where he relinquishes the right to use the money for a certain period of time.

      Money in demand deposits, or checking accounts are no different than the money in your pocket.

  19. Fractional reserve banking is not fraud but it is unfair to depositors because the Fed supplied multiplier artificially increases supply and reduces interest rates.

  20. In this case Rothbard was wrong. He was being silly wrong. He did more to fertilize money cranks than William Jennings Bryan ever dreamed of.

    Fractional reserve banking is no more fraudulent than flood insurance, to take an example. What if your house happened to be in New Orleans just before Katrina hit? Is insurance fraudulent because there is a tiny probability of the company not being able to honor its contracts? Of course not!

    RISK IS NOT FRAUD!

    Technology improves all areas of life, including money. But the full reserve Rothbardians are monetary luddites who insist that we regress back to medieval warehouse banks, where you pay bankers to store shiny metal disks.

    We need free banking, not Rothbard in a police uniform going around and arresting people who deposit money in their checking accounts.

    1. It’s truly a sad day when people have swallowed the Keynesian claptrap to the point where they are openly advocating counterfeiting.

      1. So if I want to loan Fluffy a dollar, due “whenever”, and I use the IOU he writes me to buy a beer from Brandybuck, who exactly do you want to shoot for “creating money out of thin air”? Me? Fluffy? Brandybuck? Which one of us has commited fraud?

        1. You haven’t created money out of thin air in that case. If brandybuck wants to use a receipt for a real dollar in lieu of a real dollar that’s his business. But Brandybuck is now owed the dollar from Fluffy, not you.

          The problem would be if you loaned Fluffy a thousand dollars and you only had one hundred so you printed a receipt for another 900 that never existed.

          1. I disagree. The IOU is functioning as money, therefore it is money. And my original dollar is out there circulating too, so we have created money out of thin air. Didn’t even have to sacrifice any chickens or draw a pentagram on the floor.

            1. An IOU is not money. It eventually gets redeemed for $1, the IOU is dissolved, and the overall money supply returns to normal.

              1. If the money supply “returns to normal” then that means the IOU was money while it existed.

                1. If the money supply “returns to normal” then that means the IOU was money while it existed.

                  Yes, it was money, Credit Money. But it was not Cash Money. We’ve been using the shortcut terms for so long we’ve forgotten the difference between cash and credit. The IOU was not a creation of cash money out of thin air. You would be guilty of counterfeit if it was.

                  That’s why I hate the FRB acronym, sometimes the F means Federal, sometimes it means Fractional. Two very different things.

                  As a hobbyist, I also hate the term “obsolete bank notes”. Most people think it means “notes from a bank that no longer exists” , but most of the banks still do exist – what is obsolete is the note, it is no longer redeemable.

                  1. Also, an IOU isn’t legally required to be exchanged at par value.

                    Brandybuck might’ve charged you 90 cents cash for the beer but since you didn’t have 90 cents he took your IOU-redeemable-for-100-cents at only 90% of par. Perhaps the market value of your account receivable (the IOU) is only 95 cents because you are the only one who doesn’t know that Fluffy’s a no-good SOB, but since you needed a beer real bad the best offer you could get for the IOU in the next 5 minutes was 90 cents.

                    If only you had sold the IOU to Ben Bernanke, he’d probably give you a beer and a hand job because he’s such a goddamned fun guy.

                2. The problem is that in our current system the credit is never destroyed and the money supply never returns to normal. Except maybe during a debt deflation recession like we’re experiencing.

                  1. Exactly right, H man.

        2. But isn’t a dollar bill, in effect, an IOU? Just an IOU with no specific “U” that everyone accepts on faith?

          1. Yes, pretty much. It’s also an IOU with no specific value. A dollar? What’s a dollar? A dollar’s worth? How much is that?

            1. A dollar’s worth? How much is that?

              It used to be a particular weight of gold or silver.

            2. “What’s a dollar?”

              A piece of paper or electronic token that enjoys legal tender status and must be used for payment of taxes.

              “A dollar’s worth?”

              Whatever amount of goods people are willing to trade you for it.

              1. As I said, no specific value.

          2. It is absolutely not. Obviously.

    2. Rothbard never actually suggested that the government should police banking. Maybe you should try actually reading his writings some time.

      1. No he didn’t. But it is the logical conclusion of asserting that fractional reserve banking is fraudulent. Elsewhere Rothbard describes an anarcho-capitalist society where private police would be able to arrest criminals. Along with arresting murderers and thieves, such cops would presumably arrest bankers issuing credit.

        1. You know that frb could not exist without fiat money, without a central bank, without the state coercing the pooling of risk and without the cartelization of the banking industry.

          In a perfectly free and unregulated market, no person or entity could long engage in frb.

          1. I have no idea why you believe that. Sure, a PDIC would lead to a more successful FRB system in libertopia than a PDIC-free environment, but even the existence of a PDIC isn’t predicated on any of your stated constraints.

        2. so not ever advocating private cops arresting anybody for issuing credit would be consisent with him not ever explicitly calling fractional reserve banking fraud, as in “force or fraud”(TM)?

  21. Did Rothbard advocate the state policing purely private, unregulated, fractional reserve banking with no central bank cartelizing the industry through state coercion? If so, I’d be mighty surprised.

    1. He advocated private police. Such police would arrest those who commited violence against others. Violence being defined as force or fraud. Since Rothbard says that FRB is fraud, then I suppose his private anarcho-police would be arresting private unregulated fractional reserve bankers.

      1. In a perfectly free and unregulated market, with no central bank, no coerced pooling of risk,etc., who in his right mind would agree to restrict his right to withdraw, upon demand, the entirety of his deposits?

        1. A person who wants to get paid for storing his assets in the bank.

      2. please note that Brandybuck is doing the supposing here. I have yet to read where Rothbard supposes this. And it’s not like the guy had a problem taking his ideas to their logical extreme.

  22. I like how the pro FRB people completely missed the point. It’s as if they merely skimmed rothbard and have no idea that there are counter arguments to what they say.

    1. I have read Rothbard. But I did not stop there. I also read Mises (pro free banking) and Hayek (pro free banking). Rothbard is in the wrong, and he is also in the minority camp within the Austrian school.

      1. You should’ve mixed a chemistry book in there.

      2. Rothbard was largely pro free banking, but counterfeiting is not what he had in mind. Mises also understood the trade cycle and the downside of credit expansion.

  23. You can read the full article by clicking through from here.

  24. All I wanna know is who loaned money to the Federal Reserve Bank so that the Fed can pay interest on the reserve deposits they are holding.

    1. Yes, and where does the Fed get the money to pay that interest?

  25. One more quote frm the LRC article:

    Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time

    Now, here I disagree with Rothbard. But, hey, we could do a gallup poll and solve this question. And no contract can ever spell out everything so there are always grey areas wrto what is proper and improper to assume somebody else knows or understands when it comes to passing a fraud threshold. So I don’t really care.

    But, I don’t think anything else in that particular essay can be used to say that Rothbard thought fractional reserve banking generates a new special definition of fraud that involves harming “society” or any similar claptrap. He is explicitly stating that the depositor really doesn’t understand it.

  26. Is fractional reserve banking a fraud. Technically yes as long as the Federal Reserve Bank, with the blessing of Congress and Treasury, permit the devaluation of the money in order to mask insolvency.

    But it is a fraud that is easily hedged by the moderately intelligent 2/3 of the nation, though not without some risk. So it’s mostly a semantic argument. But the law IS a semantic argument after all. Better to be on the right side of semantics than the wrong side.

    Unless you’re anti-semantic.

  27. But it is a fraud that is easily hedged by the moderately intelligent 2/3 of the nation, though not without some risk.

    Not as long as there is an income or capital gains tax. One can hedge against inflation’s destruction of purchasing power by buying commodities, etc., but when they are sold for an increased amount of currency (increased to make up for a loss of the currency’s value) one will owe a tax.` Be lucky to break even. It’s one of the reasons the income tax was instituted in the first place.

  28. Murray N. Rothbard was a smart man and a great friend of liberty. However, he did not get banking, at all.

    A banker is a trader who buys money and debt by selling credits.

    Under Commercial Law, when a depositor deposits money with a banker, the depositor SELLS his money and buys bank credit, which is a RIGHT of ACTION against a banker. The banker now OWNS the money sold to him by the depositor.

    Rothbard made the intellectual mistake of believing that simultaneous ownership exists — the gist of his argument, his beliefs. Rothbard was wrong in the extreme.

    A banker is no different than say a retailer who buys merchandise with 30-day net credit to a wholesaler. The wholesaler gives up ownership to the merchandise in exchange for a RIGHT of ACTION against the retailer.

    Lew Rockwell and his gang at the Mises Institute preach false beliefs about banking. They don’t get it.

    No grand conspiracy exists by bankers. Theft does not happen.

    However, some flaws exist with current banking design, which comes from the laws, under which all banking business arises.

    One flaw is FDIC having taxpayers funded FDIC deposit insurance. Having FDIC deposit insurance subsidizes taxpayers who escape from having to vet bankers. Likewise FDIC deposit insurance absolves bankers from providing due diligence to would be depositors.

    Due diligence is what is DUE someone by another who offers up an investment proposition. It is NOT something that you do. Dummies make that mistake, always.

    1. Lew Rockwell and his gang at the Mises Institute preach false beliefs about banking. They don’t get it.

      Not fair in the least as Michael Rozeff who provides the counter argument BD linked is a part of the LRC ‘crowd’ with an extensive archive of articles available from it.

      http://www.lewrockwell.com/rozeff/rozeff-arch.html

      1. I have enjoyed much of what Michael Rozeff has written over the years.

        I attest to being a regular reader of both lewrockwell.com and mises.com

        Many associated with both are champions of liberty and Freedom while being great foes against statism and Officialdom.

        However, those economists associated with the Mises Institute flatly do not get money, credit, banking and central banking.

        Von Mises himself, while having a shrewd mind as evidenced by his writing against Socialism, borrowed most of his economic thought from men who came in the 30 to 50 year period before him, including many of their words. In short, Von Mises was an unoriginal thinker in the domain of economics.

    2. Under Commercial Law, when a depositor deposits money with a banker, the depositor SELLS his money and buys bank credit, which is a RIGHT of ACTION against a banker. The banker now OWNS the money sold to him by the depositor.

      In practice the difference you make is meaningless and ultimately silly. Jim Bob deposits 500 dollars into Ambrosia National Bank. ANB turns around and lends to Donna’s Escort Service which happens to expanding. To cover it, they use say 400 dollars from Jim Bob’s deposit. Jim Bob comes back in a few days and withdraws 110 dollars.

      So, when he goes to fill up his tank, and he hands fifty dollars to the lady at the window he has paid in bank credit, whereas, Donna just spent two thousand on getting one of her girl’s rhinoplasty

    3. Donna just spent two thousand on getting one of her girl’s rhinoplasty she has done so using cash because the ban owned it.

      You have made a distinction without a difference, as you’ll note there is ten dollars circulating that did not previously exist.

    4. Don’t get wrapped up in the details and what they mean in regard to FRB as that is not the point. What you did is a bit more insidious. You are obfuscating the fact that the exchange from the depositor to the bank is a liability and indeed, the emphasis on it being and OWNED property of the bank as you put it would make it an asset. Get your accounting straight, that is entirely backwards.

      Bank credit, or not, the bank is still on the hook to the depositor.

      1. You must have had horrible parents, um, ?, for they didn’t give you a name and they didn’t teach you a lick about money, credit, banking and commercial banking.

        Go sue a bank over your deposits and see what any judge says with respect to ownership of money under commercial law.

        Also we know that by law, any banker can withhold paying to any depositor up to 30 days any withdrawal demand. Why is this? This is so because the banker owns all money deposited with him while the depositor owns only a Right of Action against a banker.

        Under your example, Bob SOLD his money to the banker. Bob no longer has money, but he has a Right of Action against the banker to call for future money.

        When the banker rents money under contract — a loan — to Donna of Donna’s Escort Service, Donna becomes the owner of the money and the banker has mere Right of Action against her.

        It remains to be seen if ten additional dollars get minted and enter circulation.

        If Donna pays for the rhinoplasty by check, ATM or credit card, no additional money — notes and coins — get minted.

        Notes and coins — money –come into existence only when customers of the banking system demand cash from bank tellers or ATM machines.

        Right now only $890.0 million in cash — notes and coins circulates for a $14,575.0 TRILLION economy.

        For the U.S. only money are notes and coins, all else is credit as evidenced by contract.

    5. No grand conspiracy exists by bankers. Theft does not happen.

      Uh,..Yeah. That pea is under one of those nutshells. Sure it is.

      1. So when your local car mechanic borrows tools, lubes and parts for 30 days from suppliers; and when he or she promises to pay rent, telephone and electric, while he takes cash on the spot for fixing cars, your local car mechanic has committed conspiracy and fraud against all his suppliers, his landlord, the phone company?

        Nearly all have childlike false beliefs about how the world works. Fourteen year old apprentices during the Colonial era had better understanding of business than nearly all adults today.

        1. Mechanics as a general rule do not “borrow” tools, lubes and parts for 30 days – they aren’t going to return them – they buy them on credit. They have an account – they “run a tab” – with their suppliers, and even though they get a discount or wholesale price, a certain small percentage of that price is to cover the interest for the use of that credit – whether they realize it or not.

          I once was a supplier of handmade items to a business and I can assure you I highly resented the idea that I was expected to wait 30 days to get paid. Do you think I let them use my money interest free for a month? Not likely.

          Most rents and utilities are either paid a month in advance or they are secured by a deposit – or both. There isn’t any credit being extended to the mechanic there – if anything, just the opposite.

          It isn’t fraud or conspiracy to loan money or even to extend credit. What is fraud is to try to loan the same dollar to more than one person at a time. Or to extend credit to multiple people secured by either the very same asset or no asset.

          Fraud would be when you have only $10 in your checking account and loan $10 to each of two people by writing them checks, and then hoping like hell one of them pays you back soon enough to cover the other check. It used to be known as check kiting and it was illegal. With electronic checking it’s pretty difficult for an individual to pull off these days. Banks are doing much the same thing, but they’re the ones running the game, so they don’t have much problem getting away with it.

          1. In other words – TANSTAAFL – there ain’t no such thing as a free lunch. Somebody pays for it and in the case of banks creating money, or rather, credit out of thin air, the population at large pays for it with the loss of purchasing power of their already existing money – or savings.

          2. Well, you lack experience in the car repair business.

            And yes, I used the word “borrow” loosely. The car mechanic BUYS those things WITH CREDIT — which is what the banker does, exactly.

            The tool seller SELLS tools to the car mechanic accepting CREDIT without any securing asset. No one cries fraud.

            ROUTINELY, mechanics get tools upfront without paying for them from the Snap-On tools guy. It’s call buying on CREDIT.

            You need to get up to speed on COMMERCIAL LAW. Bankers OWN all money deposited with them. They have BOUGHT the money with BANK CREDIT.

            The depositor SELLS his money and BUYS a RIGHT of ACTION.

            It’s impossible for fraud to happen because bankers do NOT “try to loan the same dollar to more than one person at a time.”

            For most, banking is too complicated for their intellects to comprehend. Because they struggle with it, they shout fraud and theft.

            They should stick to rooting for sports teams and punch a clock for work, leaving the running of business and banking to authentic men, true adults.

  29. Morgan Stanley Strategically default.

  30. The Carswell bill offers customers who want a checkable payment account only one option, a warehousing contract. (Time deposits are by construction not checkable.) By implication it would outlaw a popular option, a demand deposit contract, that offers checkability without storage fees (and possibly paying interest). The bill restricts freedom of contract and would harm bank customers.

    1. Indeed.

  31. This is discussed further in UK Proposal for Banking Reform: Fractional-Reserve Banking versus Deposits and Loans http://blog.mises.org/13868/br…..d-loans-2/

  32. Inflationists, deflationists, monetarists, goldbugs, Keynesians, Friedmanites, Austrians, freshwaterists, saltwaterists, Grid Epsilon Irregulars and others are urged to listen in.

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