Exchange on Fractional Reserve Banking With Professor Anonymous
I would like to share with you this dialogue on fractional reserve banking (frb) I have had with an eminent supporter of this system. I am not at liberty to share his name. Let me just say that he is a very prominent member of the economics profession, who has made important (well, if you are a mainstream neo-classical economist) contributions to the field of money, macroeconomics and business cycles. He has not won the Nobel Prize in economics; yet. However, when and if he does, no professional economist will have to scratch his head and say, "Who is that?" as they did when Hayek won this award.
This exchange began when Prof. A (for anonymous; don’t be looking up lists of economists whose last name begins with this letter), as I shall call him, sent me five questions, or challenges, which I copy, below, along with my replies, afterward.
(I did some very light editing on both of our contributions; mainly to eliminate spelling mistakes and typos).
I. Prof. A to Block
1. Are you aware that money has evolved far, over centuries and millennia, from being directly useful things and has become tickets or tokens that accomplish decentralized record-keeping and greatly facilitate multilateral and intertemporal transactions and clearing? These tickets, which might be considered debts of their issuers, are evidences of having delivered things of value to other persons and so represent (nonspecific) entitlements in return to receive whatever things are made available by willing suppliers at mutually agreed prices.
2. Are you aware of the verbal trickery involved in saying that money is property, that banknotes and checking deposits are or purport to be titles to this property, and that to issue multiple exclusive titles to this property is an attempt to do what is morally or legally or even fraudulently impossible?
3. Are you aware of several ways of evading a ban on merely fractional reserves?
5. Are you aware of the great advantages of financial intermediation that would be impaired by attempts to suppress fractional-reserve banking?
II. Block responds to "A"
1. Yes. And, what’s more, I enthusiastically agree with your claims in this regard.
2. This is a complex statement, with several parts; as I see them very differently, let me respond to each separately.
A. I don’t see any “verbal trickery” involved in saying that money is property. Rather, based on the comments in your first point, I think you are logically required to take the position that money IS property. After all, these “tickets” give the holder of them the right to demand real property in the market. What else could these money tickets be but property?
B. I don’t see any “verbal trickery” involved in saying that banknotes and checking deposits are or purport to be titles to this property. That is precisely what they are.
C. Here I do see “verbal trickery,” and plenty of it. It is indeed true that issuing “multiple exclusive titles to this property is an attempt to do what is morally or legally or even fraudulently impossible.” But, this is precisely MY side of our dispute over fractional reserve banking (frb). Creating more titles to property than there is property is exactly what frb does. Yes, this is verbal trickery, fraud and a rights violation.
3. Yes. but, there are also “several ways” of evading a ban on murder, rape, theft and other forms of mayhem.
4. Yes. Murderers, rapists, thieves and other bad guys are very “inventive.” But, so what? We are entirely justified in banning these acts by law since they are rights violations. And the same goes for frb. Should we repeal these laws since their violators are tricky, inventive, and we only catch a fraction of them? I think not.
5. No. There are none. Financial intermediation is irrelevant to the issue of frb. 100% reserve banks are just as capable of financial intermediation as are frbs. By financial intermediation I mean money “tailoring,” taking in large deposits, and lending them out to many smaller borrowers, or taking many small deposits, and lending them out to one or a few borrowers. Do you mean something else by financial intermediation?
Let me just say this, in closing, as a sort of general response. I regard it as fraud if there are more titles to a given amount of property, than there is property. For example, if there are 1000 cars in a small town, and there are 1100 titles to these cars. It is still fraud, no matter who agrees. Property is more basic than mere contract, for libertarianism. To put this in another way: if there are two (or more) people with a full right to any of these cars, that is a logical contradiction. Yet, fractional reserve banking implies just that; whether or not the two different "owners" of one of these cars chooses to exercise that right.
Comment: Although I invited him to do so, Prof. A declined to respond to these answers of mine. So, what might have evolved into a longer correspondence ends at this point. In his view, my response was unworthy of further discussion.