Posner vs. Block

Email Print
FacebookTwitterShare

Posner vs. Block

DIGG THIS

Walter Block’s response to University of Chicago Law School Professor Eric Posner, on the topic of fractional reserve banking.

This is an exchange of posts between me (Block) and Posner. Posner starts off, I conclude.

1. Eric Posner

More on fractional reserve banking.

Walter Block posts a response to my earlier post. He still says that borrowing money from a depositor is like selling a "square circle": it is a "logical contradiction." It’s not, as long as the contract right is defined correctly.

A and C enter the following contract. A is to give C $100 and agrees that C may do various things with it — lend it out, invest it, whatever. The contract provides further that A may demand cash up to $100 (never aggregating more than $100) from C at any time. C must satisfy the demand in cash to A if C has cash on hand; if not, C must liquidate his assets up to A’s demand and pay the proceeds to A. If, even after liquidating his assets, C does not have enough to satisfy A’s demand, he must pay what he has, and A’s ability to satisfy his claim is contingent on C obtaining additional assets.

Block says that C is "bankrupt" the moment that he accepts A’s cash and turns around and loans out part or all of it to another party, B. This is not true as a matter of law or economics. C’s loan to B is worth something and appears as an asset on C’s balance sheet. It’s perfectly possible that if A demands his $100 back on day 2, C will be able to sell the loan and use the proceeds to pay back A and even make a profit.

Still, if Block is right, I’d think libertarians would be troubled by the thought of a vibrant market, going back many, many years, in square circles, involving millions of sophisticated people on both side of the transaction, endorsed by thousands of common law judges who are responsible for all our other precious contract and property rights. It’s not a result of fraud in the sense of deceit, Block says (even though that is what fraud means). It is a kind of "fraud" where both parties, with full knowledge of a transaction that is internally contradictory, nonetheless decide to go through with it. If I offer to sell you a square circle, would you buy? With delusional behavior on such a grand scale, fractional banking would be the least of our problems.

2: Block responds to Posner

Dear Prof. Posner:

If I interpret you correctly, any contract fully understood and agreed upon by both parties would be legitimate under libertarian law. In my view, while such voluntary contracts are certainly important for the libertarian, there is even something more fundamental: they must be consistent with private property rights.

Previously, I attempted to cast aspersions on this claim of yours. I utilized a contract where a square circle was purchased or sold. I did so because there is no such thing as a square circle; thus, buying or selling one of these would be incompatible with property rights. Since they do not exist, no one can own any of them.

This did not at all convince you, so let me try again. I’ll make two attempts.

First, not all freely entered into contracts are valid. Another example, besides the square circle, is the murder contract. A hires B to murder C. A and B are fully cognizant of all particulars of this agreement, yet it is still invalid since it violates rights (of C, in this case). Here is another example: the voluntary slave contract. D sells himself to E as a slave. Again, D and E are fully cognizant of all particulars of this agreement. Many libertarians argue against the compatibility of such a contract. (I do not, but that is another story.) How do you stand on these? If you admit that either or both are improper in a libertarian legal regime, then you can no longer support fractional reserve banking (frb) on the ground that it constitutes a voluntary contract.

Second, it is impermissible under libertarian law for there to be more than one full owner of any given thing. For example, if there are 100 cars in a small town, there can only be 100 titles to these automobiles. If there are any more, for example if there are as few as 101, then one vehicle is fully owned by two people, an utter impossibility. Under a frb system with demand deposits, this is precisely what happens (your numerical example, above concerns time deposits, or a lottery ticket, so is irrelevant to the point under discussion). Consider the following case: A, the depositor, lends $100 to B, the bank. B gives A a demand deposit checking account on him for this amount. Whereupon B turns around and makes available $900 to C, the borrower; he does so by granting C a demand deposit for this amount of money. B now has $100 in its vault, and demand deposits it is pledged to fulfill for $1000, $100 plus $900. (In this case, the fractional reserve is 10%). True, as long as neither A nor C write a check for more than $100 total, this precarious system can endure. However, there is now only $100 in cash, and there are titles to it adding up to $1000. Thus, there is an over determination, as in the car case, mentioned above.

Another way to look at this numerical example is the following. Under libertarianism, there cannot be any genuine conflict in rights. Any seeming conflict must always be solved by a more clear specification of property rights. Yet, in this frb case, there is indeed a rights conflict, and, it is unresolvable, in that two people, A and C, have the full rights to the same amount of money. This simply cannot be.

I wonder, are you familiar with the large literature available on this subject, particularly with that on my side of this debate? If not, it is mentioned here, and I would dearly love to hear your opinion of it.

Dr. Block [send him mail] is a professor of economics at Loyola University New Orleans, and a senior fellow of the Ludwig von Mises Institute. He is the author of Defending the Undefendable and the newly released Labor Economics From A Free Market Perspective.

Walter Block Archives

Email Print
FacebookTwitterShare
  • LRC Blog

  • LRC Podcasts