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Source link: http://archive.mises.org/8381/getting-closer-to-debasing-the-currency/

Getting Closer to Debasing the Currency

August 7, 2008 by

Whatever the technicalities for propping up the government-sponsored paper-money systems may be, the decade-long debt binge will most likely end in inflation. This is because the “crisis” is widely perceived as a calamity — rather than the necessary economic correction of malinvestment brought about by central banks’ manipulation of market interest rates through credit and money expansion. On top of that, people fear deflation much more than inflation. Lower interest rates and more credit and money are seen as a remedy of the disease brought about by central banks’ artificial lowering of the interest rate through credit expansion. FULL ARTICLE


newson August 10, 2008 at 8:43 am

david hillary says:
“The fact that this has not happened is evidence that either the common law did not err and/or that this type of commercial arrangement is not in demand.”

well, it’s not in demand until is it in demand! current account holders who lost money in the 1930′s wave of bank collapses would have had an overwhelming demand for that type of surety. after the event.

law doesn’t always evolve in ways that promotes natural justice.

de soto’s view as to why anglosaxon common law tended to embrace the (false) equivalence of deposit and credit contracts is that it tends to focus on individual cases, losing sight of the bigger picture. jurists trained in roman law tended to take a more systematic approach, and so on the continent the distinction between the two contracts was enforced up until about 80 years ago.

jp August 10, 2008 at 12:22 pm

So if fractional reserve banking should be illegal as De Soto says, how do you propose that I be prevented in the future from willingly using a private FRB bank? Keep in mind that I am reasonably well informed about FRB, I think the product is great, and the private bank is willing to provide me with it.

Would the cops hunt me down and force me to return my FRB deposits for base money, thereby turning FRB into a black market activity?

Would I be forced to pass a test to make sure I am knowledgable enough of banking to use the product?

Would you try and sue me through the courts to prevent the bank and me from transacting?

Or are you trying to say that centuries of corrupted law has warped my senses and deluded my mind, and that in a better world I would never want FRB notes/deposits to begin with?

newson August 10, 2008 at 9:29 pm

to jp:
you could still place your funds in investment trusts or hedge funds, if you want to earn a return on idle money.

the law would be merely ensuring that the product being advertised (ie banking current account) is indeed what is being sold, and not something else.

of course, fraud still occurs in spite of legal sanctions, but this is no excuse for turning a blind eye.

why would you be going to the black market, when you could simply use a legal investment trust or hedge fund?

jp August 11, 2008 at 4:39 pm

I prefer to hold a portion of my wealth in frb checking accounts. Investment trusts and hedge funds aren’t perfect substitutes for a good old checking account.

So are you saying that the implications of De Soto’s 1000+ page tome is that the common law would evolve in such a way that all frb products would need a proper disclaimer written on them? And that’s it? No ban on frb products?

newson August 11, 2008 at 8:50 pm

to jp:
to synthesize de soto’s arguments – fractional reserve banking is not jusfifiable, either on moral or economic grounds.

he maintains that mutual agreement between two parties complicit in fraud is understandable, but not a contract that should be sanctioned by the law.

his position is that bank current accounts be treated differently from bank time deposits, and that this distinction be policed by the law.

and no, he makes no predictions about the common law evolving in this direction. (it’s hard to imagine statute law being changed along these lines, given the strong alliance between the state and the bankers).

the extensive history of frb he offers shows that the immense riches that flow to bankers from this ruse has proved irresistible time after time, going back to the ancients.

one thousand pages, yep. but if you want the most original bit, confine yourself to the first three chapters: 160 odd pages with the legal and historical view. compelling reading for freebankers.

David Hillary August 11, 2008 at 11:15 pm

So, why can’t a bank offer ‘cheque accounts’ or ‘current accounts’ whereby the terms of the contract were stipulated as per bank-customer contract at present under common law?

What do you have an objection to, exactly?
1. Cheque access to a financial debtor-creditor account
2. Use of the term ‘bank’ in connection with a financial debtor-creditor account
3. Use of the term ‘deposit’ in connection with a financial debtor-creditor account
4. Issue of securities redeemable at par on demand
5. Issue of securities redeemable at par on demand that can be redeemed by way of a payment instrument such as a cheque or negotiable order of withdrawal etc.
6. Issue of financial instruments that can be used as a means of payment or as a substitute to coin.

As you allude to, there are plenty of other ways to legally structure financial equivalents to cheque accounts. Building Societies have been doing this for over 100 years: instead of accepting deposits, they issue shares that are redeemable by writing a redemption order that can be collected and paid like a cheque through the banking system. Likewise credit unions issue shares that are redeemable or withdrawable, such shares being issued and redeemed at par, and can be redeemed by way of a withdrawal order or redemption order that is negotiable like a cheque and is collectible through the banking system like a cheque too.

jp August 11, 2008 at 11:29 pm

I’ll give it a read, but I’m very uncomfortable with the idea that freedom to contract must be prohibited in respect to frb products. I want to use them, dammit, and there are people who’ll provide them. I realize that poor banking practices and a resulting bank run could ruin me, but with a bit of research I’m sure I’ll find the right bank to trust.

I am comfortable with the idea that government created laws and institutions have favoured the development of frb products at the expense of 100% reserve products.

Hulsmann talks about this here… http://www.independent.org/pdf/tir/tir_07_3_hulsmann.pdf

Institutions like FDIC that guarantee deposits most definitely encourage people to cease making a distinction between frb and 100% products, frb banks being the beneficaries since they don’t require a storage fee.

But to go De Soto’s way and say that law must prohibit all frb products thereby allowing only 100% reserve products seems to commit the very same error that De Soto gets so upset over – blatant favoritism of one product over the other.

Frb and 100% products should be allowed to compete in a free market, the customers deciding which to choose. What happens after that is just speculation.

David Hillary August 12, 2008 at 8:47 pm

Foley v Hill was concerning an account with a bank held in the early 1830s in England. The judges held that the banker was not a fiduciary or quasi fiduciary, however it appears that the real question was NOT whether or not the balance on the account with the bank was a debt of the bank to the customer, but whether the banker-customer relationship had a fiduciary character as well:
It has been attempted to support this bill upon other grounds, and one ground is, that the relative situation of the plaintiff and defendant would give a Court of Equity jurisdiction, independently of the length or the complexity of the accounts; although it is not disputed that the transactions between the parties gave the legal right, it is said a Court of Equity nevertheless has concurrent jurisdiction, and that is attempted to be supported upon the supposed fiduciary character existing between the banker and his customer.
No case has been produced in which that character has been given to the relation of banker and customer; but it has been attempted to be supported by reference to other cases supposed to be analogous. These are cases where bills have been filed as between principal and agent, or between principal and factor. Now as between principal and factor, there is no question whatever that that description of case which alone has been referred to in the argument in support of the jurisdiction has always been held to be within the jurisdiction of a Court of Equity, because the party partakes of the character of a trustee. Partaking of the character of a trustee, the factor-as the trustee for the particular matter in which he is employed as factor-sells the principal’s goods, and accounts to him for the money. The goods, however, remain the goods of the owner or principal until the sale takes place, and the moment the money is received the money remains the property of the principal. So it is with regard to an agent dealing with any property; he obtains no interest himself in the subject-matter beyond his remuneration; he is dealing throughout for another, and though he is not a trustee according to [36] the strict technical meaning of the word, he is quasi a trustee for that particular transaction for which he is engaged; and therefore in these cases the Courts of Equity have assumed jurisdiction.
But the analogy entirely fails, as it appears to me, when you come to consider the relative situation of a banker and his customer; and for that purpose it is quite sufficient to refer to the authorities, which have been quoted, and to the nature of the connection between the parties (as to a banker’s right to lien see Brandtxo v. Barnett, 12 Cl. and F. 787). Money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker’s, is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the. principal and a small rate of interest, according to the custom of bankers in other places. The money placed in the custody of a banker is, to all [*37] intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach, of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable on the amount, because he has contracted, having received that money, to repay to the [37] principal, when demanded, a sum equivalent to that paid into his hands.
A legal right against a person is a debt the person owes, as opposed to an equitable right that may be a right to benefit from particular property held by another person in a fiduciary capacity, i.e. as a trustee or agent.

Another interesting implication of the above case is that, should the fund on account with a banker be considered to be trust funds, then no obligation to hold it in the form of metallic reserves follows: the banker as trustee, would be entitled to invest it prudently to earn interest.

I guess this case really shows how far away the bank-customer relationship is from a bailor-bailee relationship: a bailor hold the property and can’t deal in it at all, a trustee holds property but is accountable to manage it and invest it prudently, a creditor is not accountable for anything other than repayment.

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