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Posner
vs. Block
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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.
November
29, 2008
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.
Copyright
© 2008 LewRockwell.com
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