Bad Old Buttoned-Up Days
dismissed as "Victorian" these days is bound to be virtuous and
rare, yet so compelling to decent people that a mere mention scares
the pants on libertines. I'm talking, of course, about sound banking,
which the Wall Street Journal dismisses in an editorial as
Victorians were people, you recall, who upon discovering the little
secret of sex, thought the human race was about to vanish," says
the Journal. "Likewise, our modern Financial Victorians have
discovered the little secret of credit." The Victorians were merely
realistic about sex, as we are not about credit, but the wages of
sin are about to be paid.
the S&L-bank orgy, Americans no longer believe in financial promiscuity.
That's why, says the Journal, a belief in 100% reserves and
"worries about 'too much leverage' or 'too little capital' creep
out of heavily curtained conference rooms and into daily conversations."
A "modern economy runs on credit. And credit runs on fractional
reserves." Without them, banks would have "nothing to lend."
on the point that people are worried, the Journal is wrong
about everything, including the most important: the Mises
Institute's conference room doesn't have any curtains. But I
can't blame the editorialist. The entire establishment is white
knuckling it these days.
enough people realize the banks are a house of cards, it will be
52 pick-up. When a very small percentage of depositors demanded
their money, it closed the giant Bank of New England. Every other
big bank is in similar condition, protected from the same fate by
an increasingly ephemeral "confidence," with the Federal Reserve
as tender of last resort. But here's the real "little secret" of
our age: the Fed can't bail out more than a few big banks without
hyperinflation. Thus the Journal's distress. The government
is coming to the end of its rope, and it's around the neck of the
these troubles can be traced to the legal doctrine of fractional
reserves, which says that your liquid bank deposits are owned not
by you, but by your bank, to do with as it pleases. When people
realize this, it scares them. They want their money to be there
when they need it, not in some deadbeat real estate project or Third-World
Murray N. Rothbard and every other free-market economist before
the Progressive Era has argued, there are two functions in honest
banking: warehousing money as versus loaning it out. When a customer
deposits his cash for a fixed term by purchasing a CD, for example the bank can properly loan it out for one day less, with prudential
reserves against loan losses. But a demand deposit is different.
the terms of the contract, demand deposits are to be available any
time the customer wants them. In a sound system, the banks keep
100% reserves for their demand deposits. Anything else is fraud,
as the best of the Founding Fathers argued if I may be forgiven
for harking back to pre-Victorian times.
the libertarian Tom Paine said, money in a bank is "the property"
of the man who "deposits cash there." He "can draw the money from
it when he pleases. Its being in the bank, does not in the least
make it the property of the stockholders."
unsound banking is fiat paper money. The only "proper use for paper,"
wrote Paine, is "to write promissory notes and obligations of payment
in specie upon." But when a government "undertakes to issue paper
as money, the whole system of safety and certainty is overturned,
and property set afloat." It is "like putting an apparition in the
place of a man; it vanishes with looking at it, and nothing remains
but the air."
money, wrote Paine, "turns the whole country" into speculators.
"The precariousness of its value and the uncertainty of its fate
continually operate, night and day, to produce this destructive
effect. Having no real value in itself it depends for support upon
accident, caprice and party, and as it is the interest of some to
depreciate," the "morals of the country" are destroyed with "new
schemes of deceit. Every principle of justice is put to the rack,
and the bond of society dissolved."
matter how often or maybe because of how often we are told
that the bank apparitions are solid, we still want 100% reserves,
witness the extreme reluctance to leave more than $ 100,000 in any
one account. What is deposit insurance but an attempt to provide
100% reserves by another name? Unlike real 100% reserves, however,
it allows the banks to profit from what Paine called "vice and immorality."
true that eliminating deposit insurance under a paper-money, fractional-reserve
system like ours would bring chaos, but that is what's coming anyway.
Substitute hard money for paper, make the dollar an unchanging weight
of gold, and we would have a real market system.
so-called deposit insurance cannot be privatized. Banks, as entrepreneurial
ventures, are not insurable, except against poolable risks like
fire and theft. No businessman can purchase insurance against failure,
and in a free market, neither would any bank. Deposit insurance
is merely a government subsidy to the banks, and as such, illegitimate.
Without it, banks would be subject to market forces like every other
business. They would have no privileges or immunities beyond the
rule of law.
money appears," said Paine, to cost "nothing; but it is the dearest
money there is." More bank credit inflation, which the Journal
advocates to turn "bad credits into good credits," is no different;
it causes economic distortions, future recession, and illegitimate
transfers of wealth, all to bail out a group that deserves opprobrium,not
welfare for the well-connected.
nature is the same today as in the Victorian era, and so are the
laws of economics. The only solution to the bank crisis is the old
solution, which every good economist advocated before our wanton
century: honest money and honest banking. Now all we need is a Tom
Paine to lead that revolution.