If I think it is a good idea to lend a bank some money under the expectation that the bank could fail but that otherwise I will receive interest, why should any libertarian take issue with that?

I read White’s critique of de Soto, as well as his three installments on free banking. It seems to me that his critique is very technical, focusing on whether checking accounts are callable loans or not. He doesn’t address whether or not checking accounts should be callable loans. It seems to me that de Soto is arguing that checking accounts should not be considered callable loans, not that they can’t exist.

Checking accounts do act as callable loans under a fractional reserve banking system and that’s the problem. The “callable” aspect of the loans allows them to act as available cash to the lender. Then, when the bank loans the deposit to another customer, two people have a claim to the same money, which means that the banker has created money (essentially counterfeited it) and loaned it to a customer.

White seems to think that free banking, with gold as money, would solve all monetary problems. Those banks that held too few reserves would go bankrupt. He seems to be confident that the threat of runs would keep banks from maintaining insufficient reserves. But history shows that from the beginning of fractional reserve banking, it takes just a few bad bankers to ruin a lot of good banks, and they did so frequently. It was the few bad bankers who caused panics and sharp reductions in the money supply that caused people to agree to the Federal Reserve.

The problem with free banking is that panics are very contagious. If only the bad bankers and their customers suffered, I would have no problem with it. But good bankers, and their customers, suffer just as much from the resulting panic. As the panic spreads, good banks have to call in loans to cover withdrawals, and so cause good businesses to fail. That has been the history of free banking as I know it.

It seems the only solution is to require time commitments on loans, as de Soto argues and to force banks to not treat checking accounts as callable loans, but as a warehousing contract.

I agree with White, 100% reserve banks and fractional reserve banks could coexist in a free banking system. Obviuosly 100% banks could not admit FR Bank notes, and obviously in the financial markets FR notes would trade at a discount. So what? Think bond ratings.

I like De Soto and often agree with him. Why he would abandon libertarian principles to advocate the prohibition of freely entered into FR banking contracts is a mystery to me.

Sorry to go on, but just think of it like this:

Does the untrustworthiness of the USDollar make it less safe to use e-gold? Or is it an argument for doing precisely that?

and obviously in the financial markets FR notes would trade at a discount. So what? Think bond ratings.

So they’re not money substitutes! Just like bonds are not money substitutes.

100% reserve banks could absolutely accept fractional notes. The bank would clear the notes (send them back to the issuing bank) and claim the gold they are entitled.

The clearing system is a central part of any free banking system, no matter the reserve requirement.

I haven’t read DeSoto’s book (yet), but Dr. White’s discussion of it, for some reason, focuses entirely on what he calls the “need to consider whether people who have opened checking accounts might have wanted and agreed to something other than a warehousing contract, such as a callable loan contract.”

I find it strange that he only discusses the bargain between the bank and its customer, and not the set of promises and warranties that are inherent in passing the negotiable instrument — the paper bank note — through many hands throughout the economy.

In other words, the concern over the fraud of fractional reserve banking is not limited to the agreement between the bank and its customer, but between the customer and the person the customer pays with that bank’s “money.” And the person he pays with it. And so on.

Unless the bank is willing to disclose, to anyone who is even considering accepting that bank’s note, the extent and nature of the reserve assets that back all of the notes in circulation, how would anyone in the economy know the real value of those bills?

Maybe some form of enforceable, written disclosure on the face of every note, declaring the minimum fraction in reserve, would help mitigate the fraud to downstream holders of the notes.

Fully-backed notes, I am sure, would trade at greater value than those that are more fractional, so to speak.

Even if banks used 100% reserve, doesn’t that still rely on the Government having a monopoly to issue the dollar bills? Since the issue of inflation is based around the Government having the ability to print money, wouldn’t using coins made of a known content of gold and/or silver (even platinum?) be better? The Government may issue the basic standard of denomination and what the content of precious metal for each denomination would be, but it’d be up to private minting business to actually mould the coins with the intended purity? Hoping that competition amongst minters should insure against low quality coinage?

Naturally coins last longer than paper money (the fact that gold coins minted in the B.C. era are still around is obvious proof). And I’d sure we’d all feel better about the prospect of inflation insurance because the coins we were exchanging had their face value determined by their precious metal content and not by fiat?

Even if banks used 100% reserve, doesn’t that still rely on the Government having a monopoly to issue the dollar bills? Since the issue of inflation is based around the Government having the ability to print money, wouldn’t using coins made of a known content of gold and/or silver (even platinum?) be better?

Yes, metal (commodity) money is “better” at reducing inflation than paper money.

Or, put another way, central banking’s paper, fiat money was invented by government in order to make inflation easier.

Otherwise, governments have to go to the trouble of debasing (diluting) the precious metal content of coins, which is much more cumbersome. The Romans still managed to do it, though, right up to the part where it wrecked their economy and plunged the West into 1000 years of hardship.

There are several separate but inter-related issues here:
1. Fractional reserve banking (i.e., fraud);
2. Government declaration of currency value (i.e., value dictated by fiat);
3. Central (i.e., government-run) banking;
4. Government-mandated exclusion of metals in favor of paper notes and/or bookkeeping entries.

Even in an otherwise private banking and monetary system, fractional reserves are still a problem. Government’s use of central banks and paper is another layer of fraud and theft on top of that.

You seem to imply that if FR notes had a “8% backed by gold” printed on them, they’d be alright?

My problem with Federal Reserve notes goes beyond fractional reserve banking. In fact, since Nixon, the fraction that’s in reserve is effectively zero. So, even if they said “8%” on them, even that would be a lie.

But if we abolished the Federal Reserve and returned to non-socialist, private banking, then the reserve fraction disclaimer would be relevant and, I think, useful.

I’m not sure that it would solve the problem completely. I’m just saying it would help. The crux of the problem with fraud, in any context, is the adequacy of disclosure.

When you are dealing with bonds, for example, the people who trade in them have access to ratings information. The entities that issue the bonds make the disclosures to the ratings agencies, who then compiles the data.

With paper money, however, it’s impractical to have to rely on a third-party rating system. Some people won’t have access to the information. It’s time-consuming, whereas the whole idea of paper notes is convenience. That’s why I think that putting the most critical back-up data on the face of the bank note itself seems like a good idea.

Come to think of it, I wouldn’t mind seeing such data on our current Federal Reserve Notes. It would have to go something like this: “This note is backed by nothing but the US government’s ability to forcibly extract a portion of the value of your productivity. And we can print as many of them as we want, so it might be worthless before too long. Who knows?”

RogerM:

If you like that article, you’ll love this one, which I have posted several times previously:

http://www.cipe.org/publications/ert/e32/e32_2.pdf

And digital gold is already making headway:

http://indomitus.net/2004status.html

RogerM

Your above post regarding fractional reserve banking is a good one.

RogerM “It seems the only solution is to require time commitments on loans, as de Soto argues and to force banks to not treat checking accounts as callable loans, but as a warehousing contract.”

True, very true!

Björn Lundahl
Göteborg, Sweden

You seem to imply that if FR notes had a “8% backed by gold” printed on them, they’d be alright? or maybe “50% deposits” label…

If they have WiFi access and can automatically update the number shown, maybe. Otherwise, if they just say “8% backed by gold” and the issuing bank has a million dollars in notes in circulation, and a few people turn up and take out $125,000 in real money, the bank now has $725,000 in circulating notes with no available backing at all. (If the note could update itself as each note-holder takes out real money, people could spend all day watching the number tick down and racing to the bank to get their gold before it hit zero – imagine the traffic jams!)

Money must develop out of a commodity with a previously existing purchasing power, such as gold and silver had.

Man, Economy, and State, by Murray Rothbard:

“One of the important achievements of the regression theory is its establishment of the fact that money must arise in the manner described in chapter 3, i.e., it must develop out of a commodity already in demand for direct use, the commodity then being used as a more and more general medium of exchange. Demand for a good as a medium of exchange must be predicated on a previously existing array of prices in terms of other goods. A medium of exchange can therefore originate only according to our previous description and the foregoing diagram; it can arise only out of a commodity previously used directly in a barter situation, and therefore having had an array of prices in terms of other goods. Money must develop out of a commodity with a previously existing purchasing power, such as gold and silver had. It cannot be created out of thin air by any sudden “social compact” or edict of government.”

http://mises.org/rothbard/mes/chap4b.asp#5B._Money_Regression

As demand deposits functions as monies, they should also be what monies logically therefore are supposed to be, and those are only compositions of certain amounts of weights in gold, silver or other monies developed out of commodities through the market process.

Björn Lundahl
Göteborg, Sweden

All money is faith-based; it’s just a question of much faith there in it and for how long.

Irredeemable currencies have never stood the test of time or even come close, while gold has stood it for millennia. So once this latest and greatest fiat fraud comes crashing down, these wise words from a traitor to them will ring true yet again:

“Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.” — Alan Greenspan, testifying before Congress in 1999

As Rothbard wrote “it (money) cannot be created out of thin air by any sudden “social compact” or edict of government.”

The regression theory is a logical conclusion on how money must originally emerge and therefore, also, has emerged.

It has nothing to do with that “people agreed that this or that is money”, money emerged through a market process at a certain point in time when it was easier to sell a good for money than to trade a good without the use of money (barter).

Markets have universally found gold or silver to be the best standards whenever they are available.

That can, in a pure free economy, change. That is also why I wrote “or other monies developed out of commodities through the market process.”

Björn Lundahl