Fractional-Reserve Banking: The Bannination
… I know the libertarian clade includes a lot of streams which are in favor of banning the practice of fractional-reserve banking as evil, wicked, nasty, and prima facie fraudulent.
My question to them is this: since the operation of a fractional-reserve bank does not require a central bank, a lender of last resort, a fiat currency, or indeed any of the traditional aids and encumbrances of a state-run banking system -
- and, indeed, requires only that my depositors consent to lend me their money (or gold specie) on the condition that I return to them the exact same amount of it as they lent me from somewhere, and understand from the conditions of the contract that there is this small risk of a bank run; this being a perfectly legitimate exercise of their and my property rights and freedom of contract -
- and likewise the borrowers from my bank are covered by those same two things -
- how exactly is an anarcho-capitalist society, or even a halfway-decent minarchy, going to find justification in its own principles to put Big Al’s House-o-Usury out of business?
Ultimately, the presence of a central bank is the primary concern - and fractional reserve banking only makes the system that much more unstable. Modern fractional reserve banking is absolutely fraudulent. But not all anarcho-capitalists necessarily agree on the illegitimacy of fractional reserve banking outside a central banking system. This is a matter of debate even within the Austrian School, but both sides of this debate would undoubtedly recognize the sizable difference between a reserve requirement set by a central bank (and insured by a government) and one set by the voluntary exchanges of individuals.
Indeed, you are correct that reserves themselves could exist (and have, historically) - through the issuing of credit - without a central bank, fiat currency, and all the rest.
So then the question comes down to whether the reserve itself is fraud: after all, it artificially increases the quantity of money. Seeing as how this may allow money to be treated unlike any other asset by permitting banks to magically multiply their supply of rentable present goods, it is an issue that must be seriously considered. After all, how can more than one person lay an unshared claim to the same item? To be sure, this is a debate that, as de Soto showed, has waged since the early days of banking. (Savings and time-delayed deposits must be regarded as separate from the demand deposits referred to above, as depositors lose access to their holdings for the given time in which another is loaned said holdings - there is no simultaneous claim.)
Rothbard didn’t mince words in this regard:
It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts.
But on the other hand, the counter-argument - such as the one you offered - suggests that if the depositors consent to a specific reserve, there is no harm. However, there is an important stipulation that must be made: there are third parties - those who were paid with the credit or fiduciary media created from reserve - who would be owed actual money without consenting to that system. When collecting what they are owed, these third parties may be left empty-handed due to a bank run, the risk of which they never consented to. The existence of private insurance that would cover the full amount of loaned money that is in circulation, however, may serve to provide the backing for the credit, thereby potentially mitigating the possible fraud. Additionally correlated to this, within the paradigm of free banking, is that any given bank may issue its own currency altogether. A third party that accepts this currency as payment may be seen as consenting to its potential volatility, and thus such an arrangement may circumvent the issue of fraud.
I do advocate free banking, but with the obvious caveat that fraud is aggressive and impermissible. I believe, and history shows, that free banking would organically lead to a more full reserve banking system for demand (present time) deposits than in modern times. Make no mistake: simultaneous ownership of 100% of the same asset is eo ipso fraudulent; no one thing can be made to be more than 100% of itself. So the natural process of protecting against risk in an accountable marketplace would make lenders and depositors more wary of fractional reserves, and make such banks erect protections against perpetrating - and thus suffering the litigious consequences of - fraud.
First, at the very least, there would be a high reserve ratio - and because of the natural aspect of banking and asset storage in which most people do not need access to all their money at any given time (and certain accounts would have time-delayed access anyway), a sub-100% reserve ratio could emerge without necessarily presenting as fraud by ensuring that the probability of present liquidity remains well above reserves.
Mises explains this in The Theory of Money and Credit:
The development of the savings-deposit system has made it possible for the banks to undertake the obligation to pay out small amounts of savings deposits at any time without notice. The larger the sums which are brought to the banks in the investment-deposit business, the greater, according to the law of large numbers, is the probability that the sums paid in on any particular day will balance those whose repayment is demanded, and the smaller is the reserve which will guarantee the bank the possibility of not having to break any of its promises. Such a reserve is all the easier to maintain inasmuch as it is combined with the reserve of the current-account business. …
But having a high ratio, in and of itself, would do nothing to change the fact that it is still the creation of money out of nothing, and so this may be insufficient to completely dismiss a charge of fraud. Therefore, in addition to the aforementioned insurance, another, perhaps more crucial, protection to keep banks from crossing the line from deferring credit to fraud would be the issuance of an option clause limiting the ability of a depositor or redeemer - with their consent, of course, and paying them interest when exercised - to withdraw assets at will.
Parth Shah on the importance of the option clause:
Banks under a free-banking system, like banks with fractional reserves under any other system, are susceptible to runs. Free-banking theorists maintain that the option clause would be one effective means of dealing with runs on banks. The option clause, printed on banknotes, would allow banks to defer redemption of their notes provided they pay interest for the period of deferment. The clause would enable banks to protect their liquidity in the face of an unexpected increase in the demands for redemption, and allow them to adjust their portfolios. To make the clause notes acceptable to the public, banks would likely promise to pay interest at a rate higher than the market rate for the period of deferment. This penalty rate would dissuade banks from misusing the option clause. The clause would therefore serve as a crucial stabilizing mechanism for a free-banking system.
And because there would be competition in currency, banknotes and other fiduciary media with such option clauses could only survive if they retain the public’s trust.
So there would still naturally be demand deposits of 100% reserve that would function as simple storage in which a bank would guarantee the presence and availability of the deposit on demand at a fee paid by the depositor. And there would be savings and time-delayed deposits in which the bank may loan out an agreed-upon amount but only allow the depositor access to the account after a given time, in increments, or, additionally, for a fee. These two deposit types (full reserve demand deposits and savings/time-delayed deposits) would compose the bulk of accounts. And banks with the right combination of deposit types, with certain protections, may function with less than 100% reserves - but only because these protections allow for ownership to be consented to, time-shifted, and protected by other means and not because simultaneous ownership or magically multiplied money are suddenly made less fraudulent.
Hopefully this clears up things up a bit, or at least show that there is not one unified anarcho-capitalist position.
(Source: cerebralicious)
Notes:
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drwasho answered:
Brilliant job mate!
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statehate reblogged this from laliberty
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conza said:
Consenting to creating money out of thin air; (voluntary between you and bank), so what? That then gets put on the guy you eventually trade with (title backed by nothing), someone gets de-frauded. Fraud laws. tinyurl.com/6m9a926
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conza answered:
Precisely.
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laliberty reblogged this from cerebralicious and added:
a central bank is...primary concern -...fractional reserve...
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cerebralicious posted this
