As a followup to my posts Jesús Huerta de Soto’s LSE Hayek Lecture on Banking Reform; UK Parliament Speech Invokes Mises Institute re Honest Money and Sound Banking and UK Proposal for Banking Reform: Fractional-Reserve Banking versus Deposits and Loan, and Jeff Tucker’s Yesterday was a Historic Day:
Pete Boettke has blogged about Baxendale’s banking reform proposal in A Correction to a Wrong Impression From My Earlier Post and @Steve Horwitz, Larry White and George Selgin: What is Wrong With This Proposal for Bank Reform?
Boettke rightly sees the Baxendale banking reform proposal as being primarily an honest banking proposal that is compatible with both 100% banking and even freebanking–if adequately disclosed. Some of the freebankers disagree with the disclosure and clarification requirements of the proposal. Take note of Baxendale’s proposal of a “closed end mutual structure … with a big sign saying ‘Fractional Reserve Accounts,’” as a way to implement fractional-reserve freebanking (FRFB) with full disclosure. As I noted here,
As I see it, the “closed end mutual structure” Baxendale discussed as a way to implement FRFB accounts with full disclosure would make the nature of such accounts clear. Mayhap some freebankers predict that shares held in such a vehicle could trade as money. I, personally, would love to see them free to try so that we could all witness that attempt.
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Braxendale to Horwitz over at Coordination Problem;
“So I seek to get this sorted out. Safe keeping, saving and borrowing and fractional reserve lending in a environment conducive to the commercial law (closed end mutual as I see it).
Why can you not support that?”
Hm, this sounds to me as embracement of the fractional reserve banking. It is not clear to why did Lew Rockwell recommend this guy as a leading Austrian in the Great Britain?
And this other guy in WSJ unequivocally claimed that the proposal meant full banking reserve system – a 100 % reserve on demand deposits and the loans given to the banks in the form of time deposits. A standard Mises-Rothbard 100% system. But, Braxendale now says that FRB is what he had in mind. Strange, isn’t it?
It’s not necessarily inconsistent with the Mises-Rothbard system, if as a result of such a proposal, all banks become subject to the same legal principles.
Morning Nikolaj
Do you want to ban smoking, gambling, drugs between consenting adults?
I do not.
If a depositor agrees to enter into a fractional reserve banking arrangement with his bankers, in the full knowledge that he is going to pool his property with maybe many millions of others and that this deposit is going to be on lent many times, even up to 60 times over, to obtain a tiny bit of interests over and above that which he would have got should his money have been in a timed deposit, daft as this sounds, why would it be outlawed?
There is a good case to say that due to the business cycle effects that we are experiencing now, the infringement of my property rights as a bystander when the whole system collapses, are enough to make the practise unlawful. This is the view held by people more conducive to the Rothbard point of view. I have much sympathy to it.
I invited Prof Guido Hullsman to speak at the IEA here in London in the summer and when asked why he would ban a FRFB account, he said he would not, just like he would not ban anyone from wanting to jump off the White Cliffs of Dover and kill themselves. He would try and make them not, but fundamentally, if he wanted to end his life, the so bit it, it would be his life to take after all.
This made me think well what if you could provide a FRFB account in a safe environment with no business cycle implications?
I think you can, hence I have proposed on the co-ordination blog, the blog of the arch FRFB people a solution that delivers up full reserve banking, but allows people to have accounts that are fractionally lent.
This sounds impossible I here you say. It might well be, but I will propose it anyway as I think it is robust.
If you placed the FRB element of the banks business in a closed end mutual fund, you would have a depositor wishing to enter into a contact, diminishing his property rights by lending to the bank as he deposits. The bank would give him back a bank statement which is in effect a share certificate. It could on lend as many times over as it could get away with and still stay solvent within the accounting laws that YOU and I have to obey i.e. keep current creditors whole all the time so the bank is brought within the normal commercial law that all of us in business work to.
When the depositor wants redemption, he has to sell part of his share certificate or all of it, or whatever. Closed end mutuals are liquid quoted vehicles so if he found a buyer, then fine, he is redeemed in cash. Happy days for him. If the underlying assets of the FRFB are performing better, he may even get a premium or of course , it could go the other way.
There are no Business Cycle implications in doing this as far as I can see.
Could the certificate become money? Maybe, but I think not. In a free market I believe a commodity will always trump bits of paper.
This all assumes no state involvement etc.
So, I am 100% for full reserve. I think the FRFB people are not that far away from it if the do not allow their FRFB to have legal privilege and different accounting standards. I think a closed end mutual type arrangement would allow the FRFB supporter to engage in this practice without business cycle implications. In this vehicle, it should not be banned.
Lew Rockwell is a great inspiration to me and very generous with his comments.
If a depositor agrees to enter into a fractional reserve banking arrangement with his bankers, in the full knowledge that he is going to pool his property with maybe many millions of others and that this deposit is going to be on lent many times, even up to 60 times over, to obtain a tiny bit of interests over and above that which he would have got should his money have been in a timed deposit, daft as this sounds, why would it be outlawed?
Because he intends to spend his fractional reserve money, not just sit on a big pile of it. I.e., he intends to use it to buy up resources from innocent victims who don’t understand that they’re getting lottery tickets in return, and who will be wiped out when the house of cards comes tumbling down. What the “depositor” knows is not the point.
Peter, why even assume it’s money? It’s some kind of frb certificate. If someone is willing to take one as payment for a good or service and the nature of the frb certificate is clear they are no victim. Could such certificates become general media of exchange? I doubt it but so long as voluntarily accepted by a seller why call them a victim? If You accept from me an IOU or Exxon stock certificate as payment for something you are not a victim.
Indeed, I feel that FRB can lead to a possibly “fraudulent” outcome, but like IP its enforcement would have to necessarily include messing in other people’s business and property, which is unacceptable.
If someone is willing to take one as payment for a good or service and the nature of the frb certificate is clear they are no victim.
But most people don’t understand the nature of the beast. The government tells them it’s money; their bank is issuing it, and their bank is licensed by the government, whose job is to protect them, so it must be safe … as far as they’re concerned it’s as good as gold (so to speak).
Toby,
What happens when a client of an FRB uses check book money? Full reserve banks would have the incentive to emphasize their 100% full backing of the face value on the check.
Would it be legal under your proposal for FRB accounts to declare also their 100% backing /or guarantee, or whatever? Or would this rightly be considered as fraudulent?
“Fractional reserve banks would have to use a different language than they commonly use, because words such as “deposit” are deceptive. They would have to make it clear that money “deposited” with them is in fact a credit of unspecified duration. And the “bank notes” they issue would have to be presented not as money titles but as some sort of very liquid IOUs. Thus, honest fractional reserve bankers would have to instruct their customers somewhat as follows: When you invest your gold in our FR Bank, you give up your ownership for an indefinite period of time. We become the owners of the gold and may use it as we wish. In exchange, we give you “FR notes” to the full amount of your deposit, we pay you x percent interest on the investment, and we will try our best to redeem your investment in gold on demand. If we cannot redeem it, the following rules apply. . . . On the “FR notes,” one would have to find a promissory note of the following type: The FR Bank promises the holder of this note to try to redeem it out of its gold reserves. Because FR notes are not 100 percent covered by gold presently in our bank, in case we cannot redeem, the following rules apply. . . .”
hülsmann, the independent review, summer, 2000. http://www.independent.org/publications/tir/article.asp?a=245
This is great.
I think we can agree that a fractional-reserve bank has to declare that it’s notes are debts. I also agree that it’s wise for the bank to give an “option-clause” as Huelsmann describes.
However, I don’t think that it *must* give rules about what would happen if it could not redeem them. A contract doesn’t have to cover every eventuality that may arise.
Correct, they don’t have to. But it has to be clear that it’s not a guarantee and it’s possible the bank will be unable to satisfy a demand for repayment–either at the time demanded, or even ever. And because of this possibility we can expect customers to insist on the bank spelling out what would happen in such cases.
If the bank can’t pay out the money then it’s pretty clear what will happen:
The note is worthless. The person can come back at a later date hoping that the bank’s fortunes have turned around and try to get their money later. If the bank wants to work out a payment plan or some other scheme with the user then that may be acceptable.
More then likely though it’s just like any other thing. If the bank does not have enough money to cover the payment then it’s just very likely that the person holding the note will never see a dime. If they are lucky they make some fraction of a dollar back per dollar they are owed.
If the bank does not have any money then what is a person holding a note to do? Go take bricks the bank is made out of? Sue the bank owners? Take some other asset.
You can have all the agreements you want in place, but if there is no gold then there is no gold. You might want to have agreements on who has the priority of receiving the gold. But who cares, really? A higher priority on receiving something that does not exist still means that you get nothing.
It’s like if you lend me money and I go bancrupt. You can threaten me, you can sue me, you can send lawyers and policemen after me… but if I own nothing then your S.O.L.
This is why a system like this can actually work and be successful.
People will only give their money to banks that either will not lend it back out, or are conservative and have a proven track record in successful lending. Banks will only lend out money to people that have enough real credit that they are going to be able to pay it back almost certainly. Banks will have to accurately determine for themselves the level of fractional notes they can give out. You can play semantic games or whatever, but what does it matter?
No bubbles. No bailouts. No government guarantees. If you give your money to a fool, expect to lose it. So don’t give it to foolish banks. Very simple.
If the bank makes too many bad loans then it will eventually be unable to have enough cash on hand to pay demands as they come in, and this will spark a run and the bank’s liquidation. In the liquidation the assets will eventually be turned into cash and the bank’s debtor-customers will presumably get paid some fraction of their debt.
But suppose the bank does not have a spate of bad loans, but underestimates how many demands will come in from IOU holders and thus doesn’t have enough cash on hand. It would then invoke the suspension clauses and presumably would repay the debtholders eventually, but late.
The prospect of a run, of late payment, or of possible insolvency would all make people aware of the various risks associated with puttying your money into such a “bank”. I for one cannot see how IOUs from such an institution could hope to serve as money substitutes since they are not good as gold (literally).
> Money in itself isn’t savings; it only really becomes so (and then
> only indirectly) if and when its holders are able and willing to
> commit that money through making longer term loans (or equity
> investments obviously). When demand deposits (or, for that matter,
> shorter term time deposits) provide the means to make those loans,
> doesn’t this effectively exaggerate the extent of available savings?
When a person holds a fractional-reserve banknote worth 10 ounces of gold that person is saving that sum. When they hand that banknote over to another party when buying something they cease to save that amount, but that second party is saving 10 gold-ounces. That process only ends when a banknote is handed back to a bank to pay off a debt or when it’s redeemed.
> If the bank makes too many bad loans then it will eventually be
> unable to have enough cash on hand to pay demands as they come in,
> and this will spark a run and the bank’s liquidation.
That may happen, it’s likely though that the run would happen much earlier though. If plausible news were spread that the bank has made bad loans then that would cause a run. For example, bank X has made a large loan to company Y, then the news says that company Y is bankrupt. Managers of other financial institutions and other bigger investors then notice that bank X is probably bankrupt too, and start a run on it.
> In the liquidation the assets will eventually be turned into cash
> and the bank’s debtor-customers will presumably get paid some
> fraction of their debt.
That’s right, nate-m overstates the case when he says that the noteholders are unlikely to get anything. Sometimes it’s only the shareholders who are wiped out.
> But suppose the bank does not have a spate of bad loans, but
> underestimates how many demands will come in from IOU holders and
> thus doesn’t have enough cash on hand. It would then invoke the
> suspension clauses and presumably would repay the debtholders
> eventually, but late.
Yes.
> The prospect of a run, of late payment, or of possible insolvency
> would all make people aware of the various risks associated with
> puttying your money into such a “bank”. I for one cannot see how
> IOUs from such an institution could hope to serve as money
> substitutes since they are not good as gold (literally).
As George mentioned historically speaking they did serve as money. There are “various” risks, but these risks don’t necessarily add up to a large overall risk. And since a fractional-reserve bank can offer free banking services and interest there is an incentive to take those risks.
I think the main problem here is that Rothbardians over-estimate the difficulty of apportioning reserves. Usage of bank accounts isn’t really all that unpredictable. Think about you’re own usage of you own bank account. As I understand it the main problem in Scotland wasn’t predicting the usage patterns of customers, it was that rival banks tried to sabotage each others business. The main practical point of the option clause was that one bank would occasionally hoard the banknotes of another bank and then request redemption of them in the hope of exhausting the target bank’s gold reserves.
If a customer buys bonds from a bank that provides timed-savings and loans then the same problem of bad loans could happen there too, so that problem isn’t unique to FRB. The only risk that is removed by a savings and loans bank is the problem of keeping an adequate reserve.
Toby, I am fully sympathetic to your proposal at the Cobden centre. So far, it is the only plan I’ve seen which could take us to monetary and banking freedom.
However, I think you answer to Nikolaj misses the point. Mutual fund shares can be very liquid and can be used as pretty good money. It is a form of credit money, similar to discounted notes and letters of exchange – except that they are pooled and homogeneized.
There is a crucial difference with a true FRB account. In the latter, the banks commits to give back a fixed amount at any time. The price of a mutual fund, a letter of exchange or a discounted note is expected to fluctuate. Not the redemption of a FRB account : you get your full deposit (or nothing in the case of a bankruptcy).
There are at least three different contracts between the bank and its customer :
1) warehousing (depositum)
2) FRB (depositum irregulare)
3) lending (mutuum)
I see your proposal as moving from 2) to 1) + 3) and then to monetary and banking freedom. This is a transition plan, not a target. Politically, there is a slim chance this might go through, all the more since it takes care of the public debt problem in the process. But I don’t see why 2) should be banned at the target. I do think that one useful public intervention would be to make the distinction between 1) and 2) clear instead of obfuscating it. This is Guido’s “product differenciation” line. Inform the consumers and let them chose if they want to purchase a warehouse receipt, a lottery ticket – to use de Soto’s words – or a mutual fund share. Does he wish to “put”, to “deposit” or to “invest” his money at the bank? Which of the three contracts will eventually be used is for them to decide.
What is the free bankers’ proposal ? I’ve seen Kevin Dowd’s proposal to remove deposit insurance laws overnight and let the banks rearrange their balance sheet through debt-to-equity conversions. Politically, I think there is not a single chance this might ever go through. Do White, Selgin and Horwitz have similar proposals?
I should add that some non-libertarian proposals are actually not so different from yours. Kotlikoff’s limited purpose banking, Kay’s narrow banking, safe banking and boring banking proposals: all are intermediate solutions on the way to differenciate between the 1) and 2) contracts.
Thanks for your great work at the Cobden Centre!
GSF
Not clear why you associate FRB with irregular deposit in your item 2. As Huerta de Soto explains, an irregular deposit is one in which title is retained by the depositors even if the thing deposited is fungible and they are thus intermingled. But the custodian does not acquire title to an irregular deposit and may not lend it out. Thus FRB is not irregular deposit, and irregular deposit is not FRB.
does fractional reserve banking occur today?? if so how?? what is actually kept as a reserve in a bank?? solely paper currency and coin currency or something else???
FRB is the system in use in the USA. Banks are required to hold in reserve approx 10% of paper currency deposited, as per the Federal Reserve.
Toby,
the only reason for my comments and for my amusement was complete inconsistency between your position and what Mr Baker wrote in his WSJ article. He said that the people would have a choice “either to give the money for safekeeping or to lend it out to the banks FOR A TERM”. And he repeated this crucial “FOR A TERM” twice. That obviously meant that all demand deposits would be covered 100% and that only the loans given to the banks in the form of time deposits will be lent out to the third parties. This is pure and simple 100% reserve system. On the other hand, you say that you want “an honest fractional reserve system” which is something entirely different.
“This made me think well what if you could provide a FRFB account in a safe environment with no business cycle implications?”
Good luck with that. My best wishes.
“Do you want to ban smoking, gambling, drugs between consenting adults?”
This is an inappropriate analogy, because none of these activities includes the inconsistent property titles over time, as the FRB does. And this will always lead to the business cycle, as Peter explained, no matter what depositors “know” about the contract.
Nikolaj, I’d be curious to your reaction to my reply to Peter, above. If I loan money to the bank and receive an IOU in turn, then there is no fraud there, right? THe bank now owns the money and can lend it to someone else. I have an IOU and maybe the bank has promised to try to redeem it upon demand–that means, to pay back the loan early. The FRFBers may believe the bank can arrange its loans and assets so that it can usually meet such demands; but of course this is not a guarnatee. The customer has loaned his money and received an IOU in return. The bank’s obligation to repay the loan on demand is conditional and there is some risk associated with it, and presumably there would be suspension clauses so there is a chance of suspension. If a customer wants to take this risk, why not? It’s just loaning money. If he then tries to pay for goods or services by turning over this IOU, the seller is not defrauded either so long as he knows what he is accepting.
Now, I don’t think such IOUs can become widely used as a general medium of exchange. But it does not bother me that some FRFBers do think it can. So what? It’s just a different prediction.
Do you disagree with any of this?
Stephan,
That’s exactly right. A banknote or balance isn’t a property title, it’s a debt. The principle problem is that some people don’t understand that.
perhaps certain parties are keen that this misapprehension lingers.
I’m sure that if everyone knew that banknotes were debts then banknotes would continue to be debts.
then why not change the language used to reflect the economic/legal reality? then we’d not have to worry whether your conjecture is right or wrong.
As I’ve said over at the Cobden centre site I think a change would be a good step forward. If all banking contracts explained that they are debts then that would be helpful.
Stephan,
if you loan the money to the bank, your loan cannot have a zero maturity. That means that you must lend the money for some specific term, or you are not lending it at all. If you have an IOU and can withdraw your money on demand, the bank does not “own” your money, and hence cannot lend it out to the third party either. That would create the inconsistent structure of property rights over time, which would interfere with the normal economic calculation (quite independently from any issue of solvency, systemic risk etc as well as from the issue of whether IOUs are fraudulent or not). If you have an IOU on the 100 dollar bill, and the bank has an “ownership” over the same amount of money (it lends your 100$ deposit out), this operation creates a $100 of the new money supply out of thin air without any change in the time preference schedules of the public, which artificially lowers the long term interest rate, distorts the economic calculation and the rest is history. It seems to me that there is no third way between the 100% reserve system and the “ordinary” FRB. Either you have the fiduciary media or you don’t have it. As Mises explained, you will always have the same predictable incentives to the creation of credit cycle as long as you allow fiduciary media to exist.
If I correctly understood you, you assume, similarly to Mises and Chernushi, that once the central bank is removed the free banks which operate on the fractional reserves will be forced to extremely suppers the further issuance of the fiduciary media. I am not sure about that. You could be right, but I am convinced that such a system would be extremely unstable and would eventually lead to the demands for the lender of “last resort” to allow them to inflate in concert. All, of course, in the name of “stability”. As we saw time and again during the 19th and 20th centuries.
> If you have an IOU and can withdraw your money on demand, the bank does not “own”
> your money, and hence cannot lend it out to the third party either.
In that case of course a bank owns your money. It has simply promised to pay the same sum back if it is called upon to do so. There is nothing inconsistent here.
I can agree to borrow my friend Marian’s lawnmower. We both accept that the lawnmower becomes my possession, but that whenever Marian wants it back she can ask for it back and it then becomes her possession again.
This is a bad analogy. The problem with Nikolaj’s reasoning is he is assuming the SAME $100 that I loan to the bank needs to be returned to me at any time, on demand. In such a case the bank would indeed be unable to lend out that money since as soon as they do so they become unable to return it to me on demand. So lending out THE SAME $100 would indeed be incompatible with a promise to return it to me on demand. But that is not what they promise. They only promise to return to me SOME $100 plus interest. That promise only requires that they keep have some money on hand. Moreoever they are not guaranteeing to repay me on demand but only promising to TRY; that’s why they have suspension clauses and all kind of other exceptions as Guido Hulsmann mentions.
In the lawnmower case you only borrowed it for temporary use; Marian retains ownership of it which is why she can ask for it back whenever she wants; because you are only using it you are able to do so. If you sold it to a third party then you would not be able to return it since now someone else would have it and own it. That act would be incompatible with Marian’s ownership of it and your obligation to return it to her on request. That’s why this example is a bad one to use in analogy to a loan of fungible money–in a loan of money the title is given up an the money is loaned out to others (or spent). The lawn mower loan is a loan for use or commodatum; the loan of money is a loan for consumption, or mutuum; Huerta de Soto explains these categories; see also my Civil Law to Common Law Dictionary http://www.kinsellalaw.com/wp-content/uploads/publications/dictionary.pdf http://www.kinsellalaw.com/publications/#dictionary
Stephan,
I see you point, I think that your description is better than mine.
However, although it’s unconventional Marian and I could agree to a loan which involves me becoming the owner of the lawnmower. Certainly that’s not what would normally happen, but it could be done that way. Fungibility is related, but an on-demand loan can be made for something non-fungible too.
Nikolaj,
“if you loan the money to the bank, your loan cannot have a zero maturity. That means that you must lend the money for some specific term, or you are not lending it at all. If you have an IOU and can withdraw your money on demand, the bank does not “own” your money, and hence cannot lend it out to the third party either.”
Capitalist acts between consenting adults should of course be legal. If I loan the bank $1000 I have lost title to that money, in exchange for the bank’s IOU. THe IOU specifies the bank will pay me $1000 + interest. I don’t see why it has to be for a fixed term. It can specify that I can ask for the bank to repay me on demand–in which case the bank is promising to try to repay me out of its cash assets. As Guido Hulsmann says in the quote above,
The $1000 you lent the bank has presumably already been spent or used or lent out again by the bank. So if you ask for your IOU to be repaid a week later the bank pays you with a different $1000 that is has on hand. Unless it is unable to because of a run, say–but even this possibility is contractually agreed to ahead of time. So where is the problem?
” That would create the inconsistent structure of property rights over time, which would interfere with the normal economic calculation”
I don’t see how this is so–but even if it does… to be blunt: so what? If it’s legitimate, it’s legitimate regardless of such consequences. Libertarianism prohibts aggression, not “interfering with the normal economic calculation” or “creating an inconsistent structure of property rights over time.”
“If you have an IOU on the 100 dollar bill,”
It is not an IOU on THE 100 dollar bill–it is just a promise to pay you SOME 100 dollars back.
“and the bank has an “ownership” over the same amount of money (it lends your 100$ deposit out), this operation creates a $100 of the new money supply out of thin air”
In your example the $100 note was mine; then it becamse the bank’s; then it was lent out to someone else, who now owns it. Right? In exchange, I received an IOU from the bank and the bank received an IOU from its own borrower. Right? Now I do not see how these IOUs circulate as money. They are just contractual evidence of a debt. In the normal course of affairs the borrower, let’s say, uses the $100 to fund some business, which is successful; he takes $110 from his profits and a year later he repays the bank, thus extinguishing its IOU; the bank then repays me $111 or whatever. The IOUs disappear, there was no new money. Now, if for some reason the bank is unable to repay me–say, there is a run; or too many of the bank’s loans go bad–then I don’t get fully repaid; it turns out I made an unwise investment. So what? This happens all the time.
How do you envision the IOUs circulating as money if they are clearly labeled IOUs? As Hulsmann says in “Has Fractional-Reserve Banking Really Passed the Market Test?” ( http://guidohulsmann.com/ ), notes issued by FRFB’s are IOUs, and such IOUs can only serve as media of exchange in special cases of limited scope and extent.
“If I correctly understood you, you assume, similarly to Mises and Chernushi, that once the central bank is removed the free banks which operate on the fractional reserves will be forced to extremely suppers the further issuance of the fiduciary media. I am not sure about that. You could be right, but I am convinced that such a system would be extremely unstable and would eventually lead to the demands for the lender of “last resort” to allow them to inflate in concert. All, of course, in the name of “stability”. As we saw time and again during the 19th and 20th centuries.”
I’m talking as a libertarian here: capitalist acts between consenting adults should be permitted. I’m not basing this on any kind of consequentialist grounds. My own opinion is that in a free society people would deposit money in custodial accounts for safekeeping; and sometimes they would lend it out to get interest. I suspect that banks who issued on-demand IOUs would not be that popular since I don’t think they can actually succeed in avoiding bank runs. I don’t think these IOUs or fixed-term IOUs would circulate as money because they are not money and they are not as good as money. But I don’t mind if they try and I don’t mind if some people today have a different prediction than I do as to the viability and popularity of on-demand IOUs and as to whether such IOUs would serve as media of exchange.
> notes issued by FRFB’s are IOUs, and such IOUs can only serve as media of exchange in
> special cases of limited scope and extent.
In an FRFB system whenever a person needs to make a transfer out of the economic region where a clearinghouse operates they need redeem gold and use that. So, if banks A, B & C are associated with clearinghouse D then transfers can be made between them. But, if bank E is not then the only way to deal with it’s customers is by redeeming and using gold. Certainly that makes banking limited in scope and extent.
But, there are other benefits that FRFB provides. Because the bank earns interest from it’s investments it can offer banking services for free and possibly interest. Monetary gold cannot provide those services.
Historically speaking FRB banknotes and accounts have become as money-substitutes. I can’t see any reason why the future should be different from the past, so if free banking were to become a reality I think virtually all banknotes and accounts would be fractionally reserved.
If fractional-reserve bank accounts are legal then they will become a money-substitute. Historically that always what has happened.
Look at the issue from the point of view of a potential customer. Why should he or she go to the extra bother of using timed savings products when on-demand products are available? Despite what Rothbardians say on-demand products don’t entail and substantial extra risk.
I think that it would be helpful if supporters of the bill gave us a general account of when providers of a product or service should be required to make sure that customers aren’t misled. The case for the bill seems to me much stronger on a Rothbardian view of fractional reserve banking. If one rejects this view, what is the libertarian justification for full disclosure?
Current,
“In that case of course a bank owns your money. It has simply promised to pay the same sum back if it is called upon to do so. There is nothing inconsistent here.”
Can you and your best friend be the owners of the 100% of the same car in the same time? A fractional automobiles? What’s wrong with them?
> Can you and your best friend be the owners of the 100% of the same car in
> the same time? A fractional automobiles? What’s wrong with them?
We can both have 50% shares in that car certainly, but that’s not what’s going on with FRB.
With FRB one party owns the property, that party is the bank. The other parties, the customers can take possession of a specified sum of money whenever they need it. They don’t own it until they ask.
You may say “that’s impossible”, in that case your argument is like Zeno’s argument that movement is impossible. Zeno was wrong because movement happens. Similarly, fractional reserve banking has happened successfully too.
I know that Rothbardians say that the number and amount of redemptions that happen in a period of time is categorically uncertain, that’s true. But, it doesn’t mean that they can’t be predicted, they can, just as insurers regularly estimate case probabilities from their knowledge of class probabilities.
“But, it doesn’t mean that they can’t be predicted, they can, just as insurers regularly estimate case probabilities from their knowledge of class probabilities.”
this is incorrect, and historically evidenced by the regularity of bank runs.
bank runs occurred because the banks misled the customers into thinking that ALL their deposits could be redeemed at one time. With this bill, it would make it clear that depositors would NOT be able to withdraw ALL their money at one time should they decide a FRB account. In the usual case a limit of how much money can be withdrawn from the account daily would be agreed to.
that doesn’t make the event of a run any more predictable.
To be clear, I’m not saying that bank runs cannot happen.
However, historically the vast majority of bank runs occurred because the bank in question was insolvent. Or at the very least there was a convincing rumour that the bank was insolvent. Very few have occurred because of banks mis-estimating the amount of funds they must hold for redemption at any particular time.
The failures due to insolvency were caused by the same problem that can cause savings & loans banks to fail – bad loans. The bank put money into risky enterprises and got a higher failure rate than it expected.
Current, nice to have you back here. Having said that, I’m afraid you seem to be making a distinction without a difference here.
Beefcake,
As I understand it the Rothbardian view is that a run simply “may happen at any time”. That is, since the amount of redemptions is uncertain then there’s always the risk of a run. To a Rothbardian the issue is that the account balances are fractionally reserved. The amount of assets vs liabilities is not seen as important.
However, historically the amount of assets vs liabilities is very important. Runs do not simply happen at *any* time, they happen at specific times – when the bank is insolvent or close to it. The problem doesn’t lie with fractional reserves, it not related to the amount of banknotes vs the amount of reserves, that’s easy to control in normal situations. The problem is the amount of liabilities vs good assets. Once a bank becomes insolvent it’s clear it can no longer provide money substitutes or any other service, so all those who have on-demand liabilities come to it’s doors. (The only reason those who have timed contracts such as bonds don’t is because they can’t). That is the same problem that a bank offering timed savings faces too. If a bank offering timed savings and loans becomes insolvent there would be no run because it’s customer can’t run, but it would go into receivership (chap 11) all the same.
“they happen at specific times – when the bank is insolvent or close to it”
But what I really don’t get about what you say is this: surely the issuance of loans unbacked by reserves and the solvency of the bank are not independent but are in fact intertwined and impossible to separate. The question “is the bank insolvent” is dependent on “has the bank made sound loans or not” which is in turn dependent on “was the price information on which the bank and customers agreed loans sound”.
And as I understand it, once you are issuing loans unbacked by reserves, the price information is – instantly – not sound.What is wrong with this?
Salami,
Now you’re moving away from the microeconomic, legal and moral aspects of how a bank operates into the realm of macroeconomics.
If free fractional-reserve banks really did distort relative prices then I would agree with you, but I don’t think that they do. As for why they don’t, that requires a lot of macroeconomic theory. I may post about that in a while.
The distinction you make is not obvious to me – if i don’t see this clearly, i want someone to point out why. I agree with Toby Baxendale’s comment on the thread over at coordination problem
Posted by: Toby Baxendale | October 02, 2010 at 10:24 AM
http://www.coordinationproblem.org/2010/09/a-correction-to-a-wrong-impression-from-my-earlier-post.html
and I think am just phrasing it in a different way. Again, if I’m not I’d like to know why.
I’m buying a house and have saved up £100K. There is some other guy who wants the house but cannot get a bank to lend him money for it – the bank have another person they’d rather give their last £100K to.
Then they decide instead to give him a loan for £100K which is not in line with their reserves but is “unbacked” – it exists only as an entry in their books, but they generally think that there are so many reserves of gold bars sitting in their vaults that this will not cause any problems (for them).
I now have another competitor for this house that i didn’t before – the price of this house is driven up and I will pay more for it than before – not because someone rearranged their property/recourses differently (part of the game) but because this guy was given a piece of paper that took no resources of note to create. In my view, this is not part of the game at all but is a total corruption of the price system.
Yes, i understand that this issuing of unbacked credit will have consequences at some later point – but nevetheless, in the words of Mr Baxendale, “In the mean time, in this great macro equaling out, I have been royally stuffed!”
This just does not seem at all right to me.
Salami,
Since you’ve read some of the Coordination problem thread that makes things easier.
Several people over there replied on this topic. I replied at October 02, 2010 at 12:19 PM and October 02, 2010 at 06:57 PM. Would you say that anything is wrong with my replies?
sure, fully reserved banks aren’t immune to poor loan-making decisions. but runs on frb institutions tend to affect more than one entity, and asset prices can be so dramatically altered that what can appear a decent, boom-time credit, can be revealed as a sub-prime credit, after the run.
> sure, fully reserved banks aren’t immune to poor loan-making
> decisions. but runs on frb institutions tend to affect more than one
> entity, and asset prices can be so dramatically altered that what
> can appear a decent, boom-time credit, can be revealed as a
> sub-prime credit, after the run.
Why wouldn’t a crisis at a timed savings bank have a similar effect. Suppose that bank Y lends money to company X. It then issues bonds for that many of which are bought by bank Z which in turn issues different bonds.
In this case if company X failed then bank Y’s financial position would become precarious. If it failed then bank Z’s financial position would in turn become bad. There is nothing specific to FRB about contagion.
If you’re talking about the theory that FRB can cause business cycles by itself that’s a different kettle of fish.
i’m interested in how anyone could possibly finance 100% reserved banknotes. i think they’d be unfeasible as money – who would pay for the storage of the gold, and the physical costs of the notes if they were held by non-bank customers?
i can only imagine electronic deposit accounts using specie currency, or physical coins.
“Boettke rightly sees the Baxendale banking reform proposal as being primarily an honest banking proposal that is compatible with both 100% banking and even freebanking–if adequately disclosed. Some of the freebankers disagree with the disclosure and clarification requirements of the proposal. ”
I can’t resist commenting on the irony of people like Selgin and Horwitz at the GMU blog castigating the Mises Institute “party line” while clearly trying to enforce a party line of their own with regard to some of Boettke’s and O’Driscoll’s comments there.
Current: “We can both have 50% shares in that car certainly, but that’s not what’s going on with FRB.”
Exactly. And that was my point. In the FRB both you and your banker own and can use freely (subject only to the prudential and commercial criteria) 100% of your deposit. That does not make sense from the logical point of view, doesn’t it?
Nikolaj: if the banker receives title to the loaned money and loans it out, the borrower now has use of it. The lender-customer only has an IOU. He doesn’t have “the” money. If someone accepts this in payment for something now he has the IOU. If the holder presents it to the bank and demands repayment the bank, if it has enough cash on hand, repays him.
Exactly. The IOU may serve as a money-substitute and may be “money in the broader sense” but it isn’t money in the narrower sense. It is something quite distinct from the money lent.
Stephan: “I’m talking as a libertarian here: capitalist acts between consenting adults should be permitted. I’m not basing this on any kind of consequentialist grounds.”
The abolition of the FRB (see my previous reply to Current) stems not from the consequentialist, but from the logical, a priori grounds. Would you approve the type of commercial contract that would allow you and your wife to be the owners of the 100% of the same car in the same time, only because you are the “consenting adults”? That would not make any sense, I suppose? There is no difference at this logical level whatsoever between this hypothetical car “fractional ownership” and the fractional reserve demand deposit accounts. Exactly as a libertarian you should advocate the abolishing of the fractional reserve banking, for the same reason you, as a libertarian, cannot seriously advocate the “fractional automobiles”.
I don’t konw what that even means.
If I turn over ownership of my money to the bank, and the bank gives me an IOU, neither of these should be prohibited.
I agree with what Guido Hulsmann writes — quoted below. Do you?
First, Guido says in “Has Fractional-Reserve Banking Really Passed the Market Test?” ( http://guidohulsmann.com/ ), that notes issued by FRFB’s are IOUs, and such IOUs can only serve as media of exchange in special cases of limited scope and extent. I agree with this. The FRFBers apparently think these IOUs can be money substitutes; I disagree but don’t really care if they have a different prediction than we do.
And here Guido writes:
http://www.independent.org/pdf/tir/tir_05_1_hulsman.pdf
What Huelsmann is speculating about has actually happened. In Scotland it was well known that the free banks there ran fractional reserves. For several decades (until it was outlawed) their banknotes had option clauses explaining what would happen if the bank did not want to redeem. In that period those FR notes certainly did circulate as money substitutes.
Huelsmann is quite right that “People own money because they want to be sure the money is there when they want to sell it”, but that only means that they need a low risk, it doesn’t mean that they need absolute security. If absolute security were needed then people wouldn’t carry money around and take the risk of being mugged.
“What Huelsmann is speculating about has actually happened. In Scotland it was well known that the free banks there ran fractional reserves.” i dont know if thats true or not.
i have read various things here that say the scotland banks were aided by the govt in some way and other quotes that say they werent. sad.
how did the scotland bank notes as you claim look compared to other money?? did they say a 10 guinea note??? if so they would be fraud. did the person with the unbacked go to the pub and say would you take this unbacked note for some some ale ( and show the reverse side with all the non payment stipulations)?? oh, sure…i will use it to pay the guy who i buy my hops from….who paid employees in silver. were they that widespread or only a fringe money or sorts??
I was just discussing that with George Selgin on the Coordination problem blog.
He told me a banknote would say something like “one pound sterling on demand, or in the option of the Directors one pound and sixpence sterling at the end of six months after the day of demand.”
Notes of this sort were in widespread use in Scotland.
Current: “With FRB one party owns the property, that party is the bank.”
The right of ownership means the ability of an owner to EXCLUDE anyone else from possessing and using whatever he owns. If banker is contractually obliged to pay to depositor on demand the full amount of the money he (banker) allegedly “owns”, what kind of “ownership” is that? Certainly not the normal, conventional type of private ownership we have in capitalism. A banker CANNOT exclude a depositor from owning or withdrawing the money from his own deposit account. It is obvious that from the legal point of view the depositor is the owner. But, if this is so, how then a banker can lend out someone else’s money to the third party? That’s illogical and inconsistent structure of property rights, in the same way a 100% “ownership” of two persons over the same car in the same time would be.
Nikolaj, there is nothing wrong with obligating yourslef to pay someone money. I could promise to pay you $1000 on demand if I want to–as a gift, say, or as “payment” to you painting my fence. then if you demand payment a week later, I pay you the $1000–if I have it.
> The right of ownership means the ability of an owner to EXCLUDE anyone else from
> possessing and using whatever he owns.
I don’t think that what you have written is a proper definition of ownership. The next thing you write highlights the problem:
> If banker is contractually obliged to pay to depositor on demand the full amount of the
> money he (banker) allegedly “owns”, what kind of “ownership” is that?
To own something doesn’t necessarily mean that the owner can dispose of it in any way he or she wants. Because, the owner may make other contracts that allow others to do various things with his property. There may be a “lein” against the property.
For example, an owner of a field may make an agreement another party farms his field for him for a specified length of time. That doesn’t make the owner any less the owner.
> A banker CANNOT exclude a depositor from owning or withdrawing the money from his
> own deposit account.
No, but so what? The bank can rely on the fact that the account holder will not want to withdraw his or her balance. The banker can estimate the amount of redemptions that will be made in a particular time and provision a reserve accordingly.
> It is obvious that from the legal point of view the depositor is the owner
No, from a legal point of view the bank is the owner. Many court cases have established that, you can argue that the law is wrong and should be changed, but the law is that the bank is the owner.
is a lein much different than a property owner just making a choice on how to use thei own property??? i will let this wine age…i will sign a contract letting this bottle be on display at olive garden. still sounde liek control to me.
How about a banknote that reads:
“This IOU is redeemable in gold on demand, with a possible delay not exceeding the bank’s following distribution of dividends.”
Is it sufficiently clear, honest and non-cyclical for everyone’s taste?
Actually, that probably wouldn’t be acceptable. The second part of your statement is an “option clause” allowing the bank to delay payment. It allows the bank to delay payment whenever it wants not just if they’ve run out of reserves. Customers will only tolerate such a clause on notes if it is compensated for by an extra payment for interest and nuisance. That’s why historically banks have had to specify an interest rate higher than the market rate in the option clause.
but it says redeemable in gold on demand….why not truthfully say it is 100 percent redeemable at dividend distribution and possibly not 100 percent redeemable any other time…call ahead.
OK then let’s try a banknote with this wording :
“This IOU is redeemable either in gold or in a bond yielding y% interest, at the bank’s discretion.”
(Where y% is sufficiently high that the bank would want a short maturity, suspending dividends if necessary, but not so high that the bank would enter into a cycle-inducing fire sale of assets.)
Bastiat79,
“This IOU is redeemable either in gold or in a bond yielding y% interest, at the bank’s discretion.”
What you quote would probably be a very good banknote contract. Better than the ones without option clauses and clearer about the fact that the note is a debt.
Stephan
see what Hulsman has to say in these two articles:
http://mises.org/journals/qjae/pdf/qjae1_3_8.pdf and http://mises.org/journals/rae/pdf/RAE9_1_1.pdf.
“The fact that people have incentives to use fractional reserve banking is no more surprising than that robbers have incentives” (Hulsman).
Do you agree or disagree with that? Do you rather agree with Selgin, White and Horwitz, than with Rothbard, de Soto, Hoppe, Salerno, and yes, Hulsman?
You, as a libertarian, i.e. free contract absolutist, cannot object to the present fractional reserve system. Who are you to interfere with the free choices of consenting adults how they are to make their deposit contracts? Who are you to require any additional disclosure by the banks the private actors did not require on the free market? Hulsman is inconsistent here. In virtually all his theoretical works I’ve read until now (two of which I have linked above) he is an unequivocal supporter of the Rothbardian 100% reserve system (ironically even in this article you linked). However, in this Independent institute article he tries to create an “honest fractional reserve system”, which is impossible as he, among others, demonstrated in his theoretical works time and again. But, and that is my contention to you, it is especially impossible if you want to retain the absolute adherence to the doctrine of free contracts; Hulsman’s proposal is in direct contradiction to any notion of free contracting, since it requires a special form of disclosure we don’t see established anywhere in the free market. How could you, as a libertarian, affirmatively quote such an egregious infringement on the freedom of contract?
I would not speculate what led Hulsman to advocate this curious doctrine. As far as I know, no other of the Austrian big guns (Salerno, Hoppe, de Soto, Block, nothing to say about Rothbard) never accepted anything remotely similar.
Nikolaj, are you saying you disagree w/ the Hulsmann quotes I quoted above?
I think FRB makes no sense. I do agree w/ Hulsmann here. But that does not mean it is inherently fraudulent. I also don’t think ponzi schemes should be outlawed.
? I object to deposit insurance and to the state’s monopolization of the monetary and banking system.
does frb actually occur now???
“No, from a legal point of view the bank is the owner. Many court cases have established that, you can argue that the law is wrong and should be changed, but the law is that the bank is the owner.”
That only proves that the fractional reserve banking is not a “spontaneous” free market product, but the consequence of the judicial and political infringements. In the 19th century the American courts in multiple cases sided with the banks against the depositors, in claiming that the banks which were unable to pay the deposits were not the criminals, but the depositors were the bad investors. Why is that so surprising that the FRB is thriving to these days? Do you support any kind of judicial legislation from the bench, however nonsensical it might have been?
“To own something doesn’t necessarily mean that the owner can dispose of it in any way he or she wants. Because, the owner may make other contracts that allow others to do various things with his property. There may be a “lein” against the property.”
Can anyone retain the rights of possessing and using a thing, and cede the same rights to someone else? You cannot be an “owner” of a thing, and not be able to exclude anyone else from ownership of that thing, as bankers and depositors are not able (and there is only 100% of anything, not 140%). Again, the fractional automobiles… (See de Soto’s analysis of the difference between the loans and deposits in the traditional legal doctrines http://mises.org/books/desoto.pdf
The banker and depositor can agree to define the deposit as a zero maturity “loan”, but then all the loans given by the bank to the third parties on the basis of the deposits must also be the zero maturity loans (the golden rule of maturity matching). The time structure of assets and liabilities must be the same. And Hulsman’s requirements for the deposits in an honest fractional reserve system must be amended by the similar requirements for the bank lending; “you, the investor, can get the loan from our bank, but basically we cannot tell you for what period of time we are giving the loan to you, because that depends upon how much of their money our depositors would withdraw. That could be 3 months, 5 months, and up to 2 years and a half. The time is highly variable, but the average of the last two years was 9 months, although in some cases it was just 15 days”. Which investor is going to borrow in such uncertainty, with basically zero maturity? So the only “honest” fractional reserve banking would be 100 percent banking.
> That only proves that the fractional reserve banking is not a
> “spontaneous” free market product, but the consequence of the
> judicial and political infringements. In the 19th century the
> American courts in multiple cases sided with the banks against the
> depositors, in claiming that the banks which were unable to pay the
> deposits were not the criminals, but the depositors were the bad
> investors. Why is that so surprising that the FRB is thriving to
> these days? Do you support any kind of judicial legislation from the
> bench, however nonsensical it might have been?
Your allegation earlier was that fractional reserve banking is illegal. As I pointed out it isn’t. What you are actually claiming now is that it is immoral, that’s a completely different claim.
You say that fractional reserves are the consequence of legal decisions. Certainly, but what isn’t related to legal decisions. In any business at some time or other a dispute occurs and a court is called upon to adjudicate. That by itself doesn’t mean that the result of such a judgement is necessarily immoral.
> Can anyone retain the rights of possessing and using a thing,
> and cede the same rights to someone else? You cannot be an
> “owner” of a thing, and not be able to exclude anyone else from
> ownership of that thing, as bankers and depositors are not
> able (and there is only 100% of anything, not 140%). Again, the
> fractional automobiles… (See de Soto’s analysis of the
> difference between the loans and deposits in the traditional
> legal doctrines http://mises.org/books/desoto.pdf
At present a friend of mine in Dublin has a piece of artwork he has made that is waiting for me. At some point I will go to Dublin or he will come to Limerick. At that time we have arranged that he will give this piece of artwork to me.
Does that mean that there are two titles for the same property? Certainly not, it means that he owns the artwork until I call upon him to give it to me, at which time I own the artwork.
> The banker and depositor can agree to define the deposit as a
> zero maturity “loan”
It’s not a zero maturity loan, it’s an on-demand loan. If I have a 10 year maturity bond then that means that in 10 years I get the principle back. It doesn’t normally mean that in 10 years I have *the option* of getting the principle back. So, logically a zero maturity loan would be one that party A must immediately pay to party B. That’s not the same thing as a loan that party A must pay to party B when party B asks.
> but then all the loans given by the bank to the third parties on the
> basis of the deposits must also be the zero maturity loans (the
> golden rule of maturity matching).
They don’t have to be. That’s up to the bank and those counterparties that it deals with. You may believe that some “golden rule” must be obeyed, but that doesn’t mean that other people must also believe it.
> The time structure of assets and liabilities must be the same. And
> Hulsman’s requirements for the deposits in an honest fractional
> reserve system must be amended by the similar requirements for the
> bank lending; “you, the investor, can get the loan from our bank,
> but basically we cannot tell you for what period of time we are
> giving the loan to you, because that depends upon how much of their
> money our depositors would withdraw. That could be 3 months, 5
> months, and up to 2 years and a half. The time is highly variable,
> but the average of the last two years was 9 months, although in some
> cases it was just 15 days”. Which investor is going to borrow in
> such uncertainty, with basically zero maturity? So the only “honest”
> fractional reserve banking would be 100 percent banking.
In banking a loan isn’t matched by the current account of a particular investor or set of investors. It is a problem that the bank aggregates.
If the average time that a deposit is held for is 9 months then that can tell the bank something about how to plan it’s redemption reserves.
But, that has little to do with loans. If a bank makes a loan then it must obtain reserves for use when the borrower spends the loan. It doesn’t depend upon the withdrawals of account holders.
Stephan,
it is not important whether I agree or disagree (it is clear that I disagree), but that this Hulsman’s contention disagrees with his own theoretical propositions. For example:
“Rothbard’s view that banknotes are the legal equivalent of the warehouse receipts is not based on what he things the legal practice ought to be. Rather it is the other way round. Legal practice ought to acknowledge that banknotes are substitutes for money and that it is impossible that two persons dispose of the same good at the same time” (Hulsman, Free Banking and Free Bankers, p. 30)
This is EXACTLY what I am saying! If 100% system is not a juridical fiction (as Current says here) but the valid economic theoretical argument (as Hulsman says literally two sentences earlier, and as I repeat here) how than the FRB can be legal, ie. consistent with libertarianism and freedom of contract?
Stephan,
it is not important whether I agree or disagree (it is clear that I disagree), but that this Hulsman’s contention disagrees with his own theoretical propositions. For example:
“Rothbard’s view that banknotes are the legal equivalent of the warehouse receipts is not based on what he things the legal practice ought to be. Rather it is the other way round. Legal practice ought to acknowledge that banknotes are substitutes for money and that it is impossible that two persons dispose of the same good at the same time” (Hulsman, Free Banking and Free Bankers, p. 30)
This is EXACTLY what I am saying! We cannot say that 2+2=5 because we agreed so. By the same token, we cannot say that a deposit=loan, or that a banknote is money, because, you now, we want them to be and we made a contract. If 100% system is not a juridical fiction (as Current says here) but the valid economic theoretical argument (as Hulsman says literally two sentences earlier, and as I repeat here) how than the FRB can be legal, ie. consistent with libertarianism and freedom of contract?
Nikolaj, would you prohibit the bank from giving an IOU in exchange for a loan being made to it? Would you prohibit the bank from promising to repay the loan “on demand”? How is it unlibertarian or a rights violation to make a contractual promise to someone?
Would you prohibit the holder of an IOU from paying someone with it? How does it violate the seller’s rights to accept an IOU in exchange for some good or service? If I hold a $1000 Exxon Bond, could I not offer to transfer it to you in exchange for your camera?
I don’t see how you can prohibit any of these individual practices. And if you cannot how can you prohibit FRB? What exactly would you prohibit?
Although we call money placed in a bank account a “deposit,” it is actually a loan. When one “deposits” into a bank, one is relinquishing ownership of an asset in exchange for IOUs. A bank account is not a record of how much money a “depositor” has in the bank, but a record of a bank’s debt to its IOU holder. Since “depositors” do not frequently try to call in their IOUs at once, banks can operate while holding only a fraction of total “deposits” on hand. For example, if customers only call in about 10 percent of their IOUs on the average day, then a bank may operate comfortably while holding only 20 percent of “deposits” for immediate redemption. The remaining 90 percent are loaned out to earn interest. Although “depositors” run a small risk that too many others will attempt to trade in their IOUs at once, they are also compensated by the elimination of storage fees and earning of interest.
I do not understand what is so difficult to understand about this situation. The “depositor” owns the IOU and the bank owns whatever asset was “deposited”, say gold; the IOU is not for any particular lump of gold, but just a given quantity. Since all demand deposits are de facto time deposits (of an unspecified duration), so long as the bank correctly judges the quantity of gold it will need on a given day to meet redemptions, what is the problem? If the “depositors” know beforehand exactly when they would want to call in thier IOUs, the whole system could be set up almost identically using explicit time deposits only.
Lee, I think the problem may be this. The Rothbardians maintain that such IOUs could not possibly become money since they are not the same as money. The IOU is just a promissory note–an obligation on the part of the bank to repay you–if it can. Imagine a title to 10 ounces of gold held in an irregular deposit custodial account. This certificate is almost certain to provide the holder with 10 oz of gold on demand–assuming it can be verified as authentic, and assuming there is no natural disaster or embezzlement of the deposited gold (and even this can be insured against). That is why such a certificate could circulate as a money substitute.
Now if you could choose to be paid with such an instrument or to instead receive a promissory note where the Magic Bank promises to try to pay 10 ounces of gold to the bearer on demand out of its various cash and non-cash “assets”–unless it can’t in which case it can invoke a suspension clause; or unless it has become insolvent because of a spate of bad loans–which would you prefer? How could such an IOU be as valuable as a title to 10 oz of gold?
Some Rothbardians think this is impossible and that if such IOUs somehow do circulate “as money” it can only be because some financial chicanery has occurred. I think this is one reason they say FRB is fraudulent–becuase FRB notes cannot be money and if they are it had to be because of some fraud or state intervention. The freebankers apparently think such IOUs can in fact circulate as money without fraud. It seems to me that as long as we ensure that there is no fraud, then the disagreement amounts to a different prediction about whether these IOUs could or would be used as money. I do not see why a difference in prediction needs to be so contentious.
Stephan,
How could such an IOU be as valuable as a title to 10oz of gold?
The risk of being unable to call in the IOU and the risk of being unable to claim the 10oz of gold are not the only relevant variables. And while normally the risk of holding IOUs is greater than holding a title, it is not something that can be discerned for any specific casea priori.
Are less risky bonds categorically preferred to more risky bonds? Of course not, because differential interest rates can compensate bond holders for bearing risk. Likewise, FRBs can compensate its IOU holders for bearing risk by eliminating storage fees and paying interest; other benefits may include a convenient means of making payments at no extra charge. But perhaps the most important benefit is that the IOUs can be called in on demand, because while individuals cannot always predict exactly when they will need money for payments, banks can predict the spending habits of its many IOU holders more easily. The historical record of free banking in Scotland suggests that people actually prefer FRFB notes to holding gold or titles to gold, because of these benefits. While FRB is normally more risky that 100%RB, the notion that its risks are an insurmountable barrier to its success does not follow.
That said, it is also true that FRB notes may circulate at less than face value. This was particularly so with private banknotes issued in the U.S. before the Civil War, because branch banking restrictions limited circulation to a small area. The further notes travelled from their issuer, the more they would be discounted, because the risk of holding and the costs of redeeming notes from unfamiliar and distant banks was higher. Perhaps the phrase “money substitute” is misleading in this context, because such notes are not mere placeholders for some kind of base money, but independent goods with their own pros and cons.
“The Rothbardians maintain that such IOUs could not possibly become money since they are not the same as money. The IOU is just a promissory note–an obligation on the part of the bank to repay you–if it can. Imagine a title to 10 ounces of gold held in an irregular deposit custodial account. This certificate is almost certain to provide the holder with 10 oz of gold on demand–assuming it can be verified as authentic, and assuming there is no natural disaster or embezzlement of the deposited gold (and even this can be insured against). That is why such a certificate could circulate as a money substitute.”
here (as so often) the Rothbardian position is the opposite of the truth. In fact fractionally-backed banknotes often circulated as money–there’s so much evidence on this, and it has been so often pointed out to the Rothbardians, as to make their “impossibility” theorem as idiotic as one claiming that heavier-than-air flying machines are “impossible”!
What’s more, it _was_ imposssible, given technology available for most of the history of banking, for notes (“titles”) backed by 100% reserves to circulate as currency, or to do so while still earning their issuers a profit. For the warehousing of specie and the printing and administration of “titles” costs money, and fees would have to be charged to the titles’ holders. There was no way for banks to track the owners of the titles or to bill them for storing their specie if the titles circulated routinely. Repeat: no way. So you could either have non-circulating titles or circulating IOUs. Circulating titles are a Rothbardian daydream. I will bet anyone $100 in current fiat dollars that they cannot identify an exception. (Note: “circulating” means circulating as money, not just assignable on a limited basis.)
Note that I’m not claiming that some fancy technology might overcome the problem pointed out here in the future. I’m simply noting that none ever did so in the past.
Professor Selgin, Still, it seems that the main difference is one of prediction: one side predicts that in a genuine free market, with no state influence, cash and custodial-deposit titles will circulate as money or money substitutes; the other that cash and IOUs-for-cash will. So that is the key difference between them, it seems to me: a prediction about which is more viable commercially and economically. I am not convinced that one’s predictions and personal preferences ought to have a bearing on the policies one favors.
Incidentally: from what I’ve seen most of the key freebanking works are in books or journal articles that are not freely available publicly–it might help if the key freebanking books were put up online in PDF format so that people can read the works that the freebankers so often cite.
Stephan,
“Incidentally: from what I’ve seen most of the key freebanking works are in books or journal articles that are not freely available publicly–it might help if the key freebanking books were put up online in PDF format so that people can read the works that the freebankers so often cite.”Pofessor Selgin’s book “The Theory of Free Banking: Money Supply under Competitive Note Issue” is available online at the Online Library of Liberty website linked below: http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=2307&Itemid=99999999
Regards.
Many of the free-banking works are available here:
http://enxurrada.blogspot.com/
A number of my papers, including a few on free banking and related issues, can be found here: http://myslu.stlawu.edu/~shorwitz/Papers/pubs.htm
to george selgin:
re: unfeasibility of circulating 100% notes. so what? electronic precious metal transfers could well suffice for many transactions, coins and bullion could also be preferred by many.
free banking seems to work backwards from the premise that banknotes are desirable, therefore a system that enables their use – frb – is optimal.
“Nikolaj, would you prohibit the bank from giving an IOU in exchange for a loan being made to it?”
Stephan, demand deposit is not a loan. That’s the problem. Only a time deposit is a loan.
“don’t see how you can prohibit any of these individual practices. And if you cannot how can you prohibit FRB? What exactly would you prohibit?”
You are criticizing here Rothbard, De Soto, Salerno, Hoppe, Hulsman and Block (and Mises himself for that matter), not (just) me. All of them think that you can and should abolish FRB by introducing a 100% requirement for demand deposits. Mr Baker in his WSJ article says the same, that people can either deposit the money, or lend it to the bank FOR A TERM. I agree with them, and reject Selgin-White-Horwitz neo- Banking FR theory. You side with the the latter, and that’s ok. That’s the main debate today in the AE.
Nikolaj, why do you insist on calling a loan where the bank agrees to (try to) repay it on demand as a “deposit”? If the word “loan” is used instead, is it then permissible? Are you saying you would literally outlaw an arrangement between a bank and a customer where the bank agrees to try to repay the loan back upon request from the customer? Why in the world would you outlaw this?
And if you just want a term, the term can be 1 day and then there is an interest provision that says interest continues to accrue until it is presented.
> And if you just want a term, the term can be 1 day and then there is
> an interest provision that says interest continues to accrue until
> it is presented.
This is a very good point. Even if a lawmaker were to agree with Nikolaj that on-demand legal contracts should be banned then on-demand banking could continue in practice.
All that would be necessary is for banks to specify a theoretical term in which they promise to pay – say 5 days. But, they could continue to pay on demand in practice without breaking any contracts.
I want to thank the people here at the mises.org blogs for setting me straight
about FRB. I was so encouraged by their arguments that I opened a fractional
reserve auto dealership. It has been a huge success! I set a strict 12% reserve
requirement and made sure that the contracts allowed a short delay in redeeming
the customers assets (cars). I marketed the cars (I started with only 4 cars)
significantly below going prices, figuring I would make my profit on volume. Boy
did I! I sold those 4 cars a total of 29 times over the weekend. If anyone wants
to purchase a Fractional Reserve Auto Dealership franchise contact me at
http://www.biteme.kom By the way, I will be following up with a Fractional Reserve
Hotel Reservation Service.
Yours Truly, the heretic and poor
lost soul, Sy Akhplart
Too late. “Fractional reserve” hotel reservation already exists, just like “fractional reserve” airplane seat reservations. Both overbook, assuming that some people who make reservations won’t actually show up.
Russ
Clearly you do not understand how fractional reserve businesses work, the
examples you cite are businesses which return peoples money when it becomes
apparant that they are unable to provide the promised service to the customer,
because they believe a scarce resource can only be owned or ‘used’ by one person
at a time. Fractional reserve theory teaches us that this is a fallacy. A true
fractional reserve hotel (or airline) service would have no problem earning
money by providing the same scarce resource to multiple customers, customers
would not be entitled to any refunds just because the product was made available
to multiple customers.
Yours Truly, the heretic and poor lost soul, Sy Akhplart
Elwood P Dowd,
Read the bit about “tickets for bread” in Mises’ “The Theory of Money and Credit”. (p.53 in the PDF, p.67 in the Liberty fund edition).
Nikolaj: “Stephan, demand deposit is not a loan. That’s the problem. Only a time deposit is a loan.”
Demand deposits at banks _are_ loans and have been recognized as such in law for centuries. For the early English law on the subject, for example, see my paper, Those Dishonest Goldsmiths
The anti-FR folks on this blog can be expected to continue misleading people about the legal nature of bank deposits (I mean their legal nature long before governments started to interfere with market-based banking developments) until the cows come home. But that’s no reason for anyone else to fall for it.
Professor Selgin, I don’t think having a different view as to the economics of this matter and a concomitant view as to how these relationships should be described is misleading; it’s a difference of opinion. My view is that “deposit” implies to most people a warehousing or irregular deposit; but this is just an empirical matter. I personally don’t think it matters too much what words are used so long as it’s disclosed adequately–so long as the holder of an IOU FRB note realizes it is in fact a promissory note and not backed by 100% reserves as in an irregular deposit. If this is clear enough to those who accept such notes that seems sufficient to me–as long as they could be distinguished from 100% reserve “title” notes.
The thing is, Stephan, that the law I referred to in my previous post was in fact the English Common law (itself, in this instance, informed by conventions dating back to ancient times). Now, common-law decisions do not _dictate_ what business contracts and the terms used in them mean. They reflect and clarify established business usage. In other words, the common law courts determined long ago what a bank “deposit” meant to “most people” concerned with the banking business-bankers and customers alike. Evidently the courts never found the language on banknotes and such to be at all deficient, as you suppose it to have been. Look at any old banknote–I mean a note from a commercial bank. You will see that such notes offer to pay “the bearer” a certain sum of money “on demand.” That is the language of a debt contract; it isn’t the language of a title or bailment contract or warehouse receipt. It says nothing about storage, or about you being the true owner of the sum in question. It says, simply, that when you demand that sum, the bank is obligated to come up with it at once.
Of course there are, have always been, and will always be yokels who imagine, despite the lack of any language suggesting it, and despite myriad court cases affirming the status of bank “deposits” as debts, that their deposits (or notes) are mere bailments. But the law doesn’t and can’t reasonably cater to such people. Libertarians rightly object to ridiculous “truth in labeling” laws that would, for instance, have all refrigerators bear labels warning people not to confuse them with backpacks (I refer to an actual case I once read about!). Well, for the same reason, they should object to arguments for putting elaborate labels on banknotes and such to explain what was already perfectly clear to most intelligent people.
And by the way: have you ever read the language accompanying your bank deposiit contract–the so-called “agreement and disclosure”? If you do I think you will be hard-pressed to argue that anyone save a fool could understand it as suggesting that such deposits are mere bailments. Here for instance is a passage from Bank of America’s agreement:
“Our deposit relationship with you is that of debtor and creditor. This Agreement and the deposit relationship do not create a fiduciary, quasi–fiduciary or special relationship between us. We owe you only a duty of ordinary care. Our internal policies and procedures are solely for our own purposes and do not impose on us a higher standard of care than otherwise would apply by law without such policies or procedures.”
You will find the equivalent language in every instance, today and going back to the beginnings of banking.
Now I ask you: what is it that’s misleading about this language? How would you make it more explicit than that? Do you really see a market failure here, warranting more government “protection” of consumers?
I’ll say it again, for the sake of those sitting the fence in this ongoing debate: The anti-FR stance is an embarrassment to the modern Austrian School. It needs to be ditched, and the sooner the better, if we aren’t _all_ going to look like yokels.
Professor Selgin,
I am simply making the point that there is a difference between having your money put into a 100% reserve custodial account–what I think is quite accurately described by Huerta de Soto as an irregular deposit; and loaning your money and receiving an on-demand IOU in exchange for it. I don’t think you disagree that there is a difference. And that this difference should be made clear on the notes: one would be an IOU note, the other would be some kind of 100% title. So long as it’s clear I have no issue. I also have no special interest in the details. If some bank customers got an IOU and thought they had a title note they might file a suit; if they won, banks would adjust language accordingly; if they lost, it would be caveat-customer and customers would gradually become aware.
“It says, simply, that when you demand that sum, the bank is obligated to come up with it at once.”
Well, but they are not–are there not suspension clauses? But regardless, either way–I have no problem with someone agreeing to accept such an obligation. Yes, it’s just a promissory note. To me the difference is this: if you have title, the bank is obligated to let you reclaim some of your money–money that is there in the vault, money that the bank does not own. Now, is there a chance you’ll be unable to get your money? Yes—there could be embezzlement or tornado. Or the title may be faked. But title can be authenticated to a sufficient degree of satisfaction, and the other risks can be insured against in one way or another. If I hold a promissory note the bank is obligated to try to repay me out of current cash; it may not be able to, for any number of reasons, either on time, or at all. So there is a chance here I will be unable to collect–loans are not riskless, after all. The magnitude of the risks may be similar, or they may not be, but they are not the same type of risk. A loan is different than title. And this should simply be reflected on the instrument held by the customer.
The position I am laying out here seems indisputable and reasonable to me. I have to assume you do not disagree with this. If I am wrong please feel free to correct me.
I don’t see what the relevance of current banking laws are; there is no reason to look closely at it because I konw my “deposit” is insured by FDIC. Absent deposit insurance I would of course want to know whether my money is loaned ot the bank, or whether I retain title in an “irregular deposit.” I have little doubt that the banks would make this clear. I just have a different prediction than you about whether such IOUs would serve as money. If someone wants to accept such an IOU as payment, and then use it in exchange with someone else, and so on, so that they become general media of exchange–money–no problem. As long as each step along the way is legitimate, I see no problem.
To be clear, I am not calling for regulation of private companies to make them jump through consumer protection hoops. In fact I am a strong believer in caveat emptor (or caveat depositor). What I do favor is the law–so long as the law is going to regulate these matters–declaring the nature of the arrangement, who owns what, and distinguishing between an irregular deposit and a loan.
“Then you should say what you mean,” the March Hare went on.
“I do,” Alice hastily replied; “at least—at least I mean what I say—that’s the same thing, you know.”
“Not the same thing a bit!” said the Hatter. “Why, you might just as well say that ‘I see what I eat’ is the same thing as ‘I eat what I see’!”
“You might just as well say,” added the March Hare, “that ‘I like what I get’ is the same thing as ‘I get what I like’!”
“You might just as well say,” added the Dormouse, which seemed to be talking in his sleep, “that ‘I breathe when I sleep’ is the same thing as ‘I sleep when I breathe’!”
“I’ll say it again, for the sake of those sitting the fence in this ongoing debate: The anti-FR stance is an embarrassment to the modern Austrian School. It needs to be ditched, and the sooner the better, if we aren’t _all_ going to look like yokels.”
Since you’ve admitted at the GMU blog that you explicitly avoid the Austrian label in your professional activities, why is this advice to be taken seriously by Austrians? On a less kind note, what you’re saying here is, “you’re making me look bad, so shut up.” Again, why should I give two shits about what other people (namely, the mainstream economists you and Horwitz are trying to curry favor with) think of YOU? That’s your problem, not mine.
prof Selgin,
I hope that you don’t accept as a general principle the idea that every doctrine established by the courts is automatically sensible or logical. If that was the case, you could believe not only that demand deposit is a loan, but also that the Interstate Commerce Clause forbids you to grow the medical marijuana in your own garden for your personal use.
“grass” is not grass. This has been established through common law. Is that clear now?
No, Nikolaj, I don’t consoder the courts infallible, or even close to it. But w.r.t. the common law, which is (by common agreement among classical liberals) the closest thing to market-based law, there is good reason for generally deferring to the courts.
Here, for example, is what one libertarian authority, whose opinion I’m sure you will find it hard to reject out-of-hand, has to say about this matter:
“In the common law of England, Roman law, and the Law Merchant, law was formed in large part in thousands of judicial decisions. In these so-called “decentralized law-finding systems,” the law evolved as judges, arbitrators, or other jurists discovered legal principles applicable to specific factual situations, building upon legal principles previously discovered, and statutes, or centralized law, played a relatively minor role. …[T]he position of common-law or decentralized judges is fundamentally different from that of legislators in three respects. First, judges can only make decisions when asked to do so by the parties concerned. Second, the judge’s decision is less far-reaching than legislation because it primarily affects the parties to the dispute, and only occasionally affects third parties or others with no connection to the parties involved. Third, a judge’s discretion is limited by the necessity of referring to similar precedents. Legal certainty is thus more attainable in a relatively decentralized law-finding system like the common law, Roman law, or customary law, than in centralized law-making systems where legislation is the primary source of law.” (S. Kinsella, “Legislation and the Law in a Free Society.” Mises Daily, Feb. 25, 2010.)
I am flattered that you quoted me!
Again, I am not trying to micromanage private businesses. I am not arguing over the details of what wording should be used. I am sympathetic to the arguments–say, by Guido Hulsmann–that the word “deposit” is or can be misleading, but I understand your reliance on established practice regarding waht this means. I do not claim to be an expert in the history of these matters. I am skeptical that IOUs could serve as money substitutes on a widespread scale; and I am sketpical that the historical examples are unambigious in this regard; but I have not argued this strenuously here because (a) I have not taken the time to carefully digest the competing literature about this (though I’ve read a good deal of it and formed my own quasi-layman’s opinions); but more importantly (b) because it does not matter as it only affects one’s predictions about how successful FRFBs would be and how popular such IOUs woudl be and how suitable they would be to serve as money–in a genuine free market economy. My primary aim is to oppose the state banking system with its deposit insurance; and in a free economy, to simply ensure that there is a distinction between loans and irregular deposits. What people do with their freedom in a system of property rights is up to them.
Newson: “to george selgin:
re: unfeasibility of circulating 100% notes. so what? electronic precious metal transfers could well suffice for many transactions, coins and bullion could also be preferred by many.
free banking seems to work backwards from the premise that banknotes are desirable, therefore a system that enables their use – frb – is optimal.”
I see. And when Rothbardians insist that fractionally backed banknotes can’t possibly serve as money substitutes, despite the fact that even the technical problems I referred to w.r.t. them don’t exist in that case, and also despite abundant empirical evidence to the contrary, what sort of reasoning process are they employing?
Whatever it may be, my comments above where in answer to a specific “Rothbardian” claim about circulating notes. It’s a cheap shot to pretend to counter an argument by merely twisting it out of context. Anyone who reads my 11:37AM post can see that it begins with and then replies to a particular passage from another post. Perhaps even Newson may take the time to read it now that it’s been pointed out to you. Perhaps he will even get to the last sentence of that post–the one that reads: “Note that I’m not claiming that some fancy technology might overcome the problem pointed out here in the future. I’m simply noting that none ever did so in the past.”
to george selgin:
i don’t identify myself with any rothbardian cult, cute labels are too reductive. and yes, i had read your post. and i believe that much of freebanking ends up being justified by presenting the “successful” operation of frb. the court says this is a legitimate operation, so the law is right. ignorance is no defense before the law, we all know what terms mean, etc.
fancy technology is neither here nor there. in the past commercial transactions would have been settled in some manner other than bank notes had frb been illegal. market participants would have found some other accommodation, as they always do.
With full disclosure for notes and deposits, FRB notes and deposits and 100% Reserve notes and deposits would not be fungible and would not trade at part. In this state of affairs, good money will drive bad money away.
“With full disclosure for notes and deposits, FRB notes and deposits and 100% Reserve notes and deposits would not be fungible and would not trade at part. In this state of affairs, good money will drive bad money away.”
Like so many members of the anti-fractional reserve camp, Mr. Novais relies on assertions lacking the least bit of support from theory or experience. Let’s consider: in the U.S. until the end of the Civil War, professional brokers traded in the notes of various banks, pricing them according to the cost of returning them for redemption and their estimates of the risk of non-payment. These brokers, some of whom were former bankers themselves, surely weren’t ignorant of the fact that the notes they were dealing in were all backed only by fractional reserves. (Gary Gorton, in a JPE article, even offers evidence to the effect that their prices were not obviously inconsistent with the efficient markets hypothesis.) well, in fact the notes did sometimes trade at par. For example, in October 1863, _all_ New England bank notes traded at par throughout the region. And, for the Union as a whole (the banks of the Confederacy were at this time on a different standard), the _total_ discount from face value at New York or Chicago for the aggergate stock of notes was _less than one percent_!
That was the antebellum U.S., where the lack of branch banking was responsible for a notoriously non-uniform banknote currency. In every other instance I’m aware of, note discounts par circulation of fractional reserve notes was the norm, discounts having been rare if not unknown. Yet in all these instances, bankers themselves were among those acceprting rival banks’ notes at face value. Do you suppose that _they_ also didn’t realize that their rivals notes weren’t backed by 100 percent reserves? (And please don’t say that it was a consipracy: there’s plenty of proof that collusion had nothing to do with it.)
So, go back to the drawing board, Mr. Novais. Or better still, consult some history before making claims about the consequences of fractional reserves.
History needs a theory. As Stephan Kinsella said “I am sceptical that the historical examples are unambiguous in this regard”.
It must be inquired why such par values were observed. No doubt, a very little expected risk during the good times (like in the beginning and middle of a bubble provided by credit expansion) makes a discount negligible. But should we ask also: was there in place a systematic disclosure? And after particular banking crises, was it not the case that the banking system and political environment more or less increased the expected implicit or explicit guarantees? What are incentives for a 100% bank if the all system is working and benefiting from a FRB? The incentive only works if the bank refuses to participate in the economics of the bubble and when the inevitable banking crises emerges, the FR Banks goes bust, there is not suspending of redemptions, etc.
What we know is that a thing and a IOU on a thing is not the same economic thing and as such, one is derived from the value of the other.
I agree that FRB notes and deposits (with other label?) should be possible and even that FRB banks could coordinate some sort of clearing services to prevent minor liquidity problems. It’s a pure contractual choice. But the disclosure should be clear and notes or IOUs (FRB notes) from each bank (or from the same clearing and issuing system, where several banks could be participating) should be identifiable. And the most important thing is not to have in place restrictions on redeeming or circulation of physical money.
Then the problem of the sate: will he accept revenue in commodity money and IOU at par value? Was not the state directly or indirectly issuing (or demanding from issuers) FRB IOU on his own interest and giving a confused (also on his own interest) message about the fractional status?
What we are trying to envisioned here, is what would happen in a free money economy. Would the competition force a real time disclosure of reserves for FR Banks? And this is an interesting point of discussion, in the current system, in the name of financial transparency and “costumer’s rights”, why we do not see Central Banks regulating for real time reserve disclosure? Well, because the system would fell apart.
“t must be inquired why such par values were observed. No doubt, a very little expected risk during the good times (like in the beginning and middle of a bubble provided by credit expansion) makes a discount negligible. But should we ask also: was there in place a systematic disclosure?”
I repeat: the market for banknotes includes expert market makers, including rival banks themselves and the note brokers of the antebellum U.S. Under such circumstances what was or wasn’t disclosed to the mass of note holders hardly mattered, for it would have been rational for them in any case to defer to the expert market makers in determining how to value notes. (Thus the average U.S. shopkeeper accepted any notes that were “current” at local banks or brokers offices, without troubling to otherwise inquire into their issuers assets, while typically rejecting “uncurrent” notes.)
Like perfessor Selgin said, all you anti-FRBies need to stop embarrassing us
all. He is a cleverer fellow than all of us and we can learn a bunch from him.
Like he said, if a bank says that what they are really doing is not actually
what they told us they were actually really doing, then they really aren’t
actually doing what they led us to believe they were really doing, actually. See
how clever he is, and in the tradition of really clever people he understands
that honesty has nothing at all to do with all of your statements being in
accord with each other, and certainly has nothing to do with ones statements and
actions being in accord with each other. You silly yokels. Obviously if you
spend all day shouting things that are untrue, but occasionally say under your
breath, “but not really” then you aren’t dishonest, you’re just a businessman.
Just like the banks that tell us daily that the money in your checking account
is “yours”, and that “your money” is safe with them, and that it is “your money”
that you spend when you write a check; but then in the small print say “but not
really”. Besides, what kind of embarrassing yokel believes that fraud has
anything to do with seperating people from their wealth by means of saying one
thing and doing something entirely different? There certainly is something very
embarrassing about all of this……
Yours Truly, the heretic and poor lost soul, Sy Akhplart
Here are words that appear in every modern bank “agreement and disclosure” for customers opening new accounts:
“Our deposit relationship with you is that of debtor and creditor. This Agreement and the deposit relationship do not create a fiduciary, quasi–fiduciary or special relationship between us. We owe you only a duty of ordinary care. Our internal policies and procedures are solely for our own purposes and do not impose on us a higher standard of care than otherwise would apply by law without such policies or procedures.”
Very deceitful, isn’t it?
pity there’s no explicit mention of the “run” or “insolvency”. yikes, that’d be scary. anyway, everybody’s seen “it’s a wonderful life”, so i guess they’re fully apprised of what happens.
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