Conversation About Fractional Reserve Banking

Here is an interesting informal conversation about fractional reserve banking between me and S. Read from the bottom up, in order to get the gist of this material.

From: Walter Block [mailto:walterblock@business.loyno.edu]
Sent: Friday, March 11, 2016 12:33 AM
To: S
Subject: RE: Against Fiduciary Media

There’s also the fact that I am on record in maintaining that people can only own property, but not its value:

Hoppe, Hans-Hermann and Walter E. Block. 2002. “Property and Exploitation,” International Journal of Value-Based Management, Vol. 15, No. 3, pp. 225-236; <http://www.mises.org/etexts/propertyexploitation.pdf http://www.mises.org/etexts/propertyexploitation.pdf

So, maybe no one else can sue for fraud on this ground? Maybe money is somehow different? Hans, Guido, please help me out on this. Stipulate that fractional reserve banking is fraudulent. Who may sue for fraud?

From: S
Sent: Thursday, March 10, 2016 9:25 PM
To: Walter Block
Subject: RE: Against Fiduciary Media

Two thoughts. First, there would offsetting fraud claims, since each faux owner of money would have a claim against every other faux owner. Second, each other holder of money is aware of and actively participates in the system, so how can he complain? Kinsella has written a lot on estoppel as a basis for levying punishment against an aggressor; it seems estoppel might be relevant here too. If you participate in a fraud scheme, you are thereby estopped from crying foul when someone defrauds you under the same scheme.

If knowledge and intention are relevant, then the best “out” is that non-Austrians are too stupid to know what FRB is, so they can’t be participants in the fraud and thus can sue for it (of course the only ones they could sue would be Austrians!). But if knowledge and intention are not relevant, only action is, then that “out” doesn’t work.

From: Walter Block [mailto:walterblock@business.loyno.edu]
Sent: Friday, March 11, 2016 12:00 AM
To: S
Subject: RE: Against Fiduciary Media

How’s about the claim that fraud is being perpetrated on all other holders of money, since their money is now less valuable because of FRB?

From: S
Sent: Thursday, March 10, 2016 9:06 PM
To: Walter Block
Subject: RE: Against Fiduciary Media

Walter:

I agree that there is too much title and not enough property. But it seems to be a wrong (per your paper, a “fraud”) that is not actionable. In which case someone could say “So then why should we care about this?” (meaning from a moral point of view; obviously it has terrible economic consequences per ABCT). Sort of like the conundrum, if a husband says something and his wife is not there to hear it, is he still wrong? S

From: Walter Block [mailto:walterblock@business.loyno.edu]
Sent: Thursday, March 10, 2016 11:18 PM
To: S
Subject: RE: Against Fiduciary Media

Dear S:

I now see your point. Sorry for being so slow.

I’m getting more and more forgetful as I age. Whenever I am guilty of this with my colleagues at Loyola, I tell them I’m getting senile; getting Alzheimers. They, especially the younger members of my department, reassure me. “No, no,” they say. “You’re not getting senile; you’re not getting Alzheimers. (pause).. You’re already there.” With friends like these ..

Perhaps “fraudlent” is the wrong word. Maybe “contradiction” is better. Can you think of anything even more apropos? The point is, in fractional reserve banking, there is an overlap of rights. People, together, have a right to more than 100% of specific money. Or, put this in another way, there are more owners than there is property. Think of the Mel Brooks movie, “The Producers.”

Best regards, Walter

From: S
Sent: Thursday, March 10, 2016 6:43 PM
To: Walter Block
Subject: RE: Against Fiduciary Media

All of those I mentioned in my original email are in a similar situation to the depositor: the borrower from the bank also knows that the bank is doing this, the people to whom the depositor writes a check know that the bank is doing this, and investors in and lenders to the bank know that the bank is doing this. Thus my original question: if everyone in the banking “ecosystem” knows about fractional reserve banking, who can sue for fraud?

Perhaps a Martian visiting earth for the first time (or Bernie Sanders)?

From: Walter Block [mailto:walterblock@business.loyno.edu]
Sent: Thursday, March 10, 2016 8:28 PM
To: S
Subject: RE: Against Fiduciary Media

I spoke too quickly. My error. Sorry. The guy who voluntarily, and knowingly, deposits his money in a fractional reserve bank cannot sue for fraud.

From: S
Sent: Sunday, March 06, 2016 7:30 AM
To: Walter Block
Subject: Re: Against Fiduciary Media

Walter:

That’s what I’m struggling with. How can someone sue claiming fraud when he was fully aware of it? If I agree to pay you $1,000 for a car in your possession, and before giving you my money someone else shows up with a valid title to the car, if nonetheless I hand over my money to you, can I later sue you claiming fraud? S

On Mar 5, 2016, at 9:54 PM, Walter Block <walterblock@business.loyno.edu wrote:

Dear S:

In my view, all those victimized for fraud can sue for it. That is, all of those you mention.

Best regards,

Walter

From: S
Sent: Saturday, February 20, 2016 3:56 PM
To: Walter Block
Subject: Against Fiduciary Media

Walter:

I read your, Hans’ and Guido’s excellent 1998 paper entitled “Against Fiduciary Media”.

Hoppe, Hans-Hermann, with Guido Hulsmann and Walter E. Block. 1998. “Against Fiduciary Media,” Quarterly Journal of Austrian Economics, Vol. 1, No. 1, pp. 19-50, http://www.mises.org/journals/qjae/pdf/qjae1_1_2.pdf;
http://www.qjae.org/journals/qjae/pdf/Q11_2.pdf; translated into Spanish and published as “Contra los medios fiduciaros,” Libertas, No. 30, May 1999, pp. 23-73; 2011 translation and reprint in Romanian Economic and Business Review

I appreciate that the issuance of fiduciary media constitutes a fraud, in that two people cannot both own the same property at the same time. However, my question to you, which I don’t think is addressed in this paper, is this: Who could legitimately bring an action for fraud? If the depositor knows that the bank will lend out his demand deposit and that the bank is keeping less than 100% reserves against this deposit, if the borrower from the bank also knows that the bank is doing this, if people to whom the depositor writes a check know that the bank is doing this, and if investors in the bank know that the bank is doing this, who can legitimately complain about or sue for fraud? S

Dear S:

A lends $100 to B, the bank. B gives A a demand deposit for that $100. Under fractional reserve banking, B then lends $90 to C, giving C a demand deposit for $90. A and C each think they own, respectively, $100 and $90. Yet B only has $10 to make good this “ownership.” To my way of thinking, it doesn’t matter that both A and C “know” what is going on. B should be legally obligated to pay them respectively, $100 and $90. That’s what B’s contract with A and C stipulate.

Take the case of Mel Brooks’ movie, “The Producers.” Various little old ladies “own” oh, 5000% of this play. It is a success. Assume they each “know” that Max Bialyschtock has oversold the play. Yet, in my view, fraud has been committed against them, if they insist on being paid their share of the profits of the play. Only in the case where none of these elderly ladies insist on being paid is there no fraud. Then, I would interpret their “investments” in the play as a gift. Thus, in this case, there really is no “investment.” There is just a gift from them to Max.

Similarly, in the banking case, if A and C do not get their money when they want it, and don’t care, then no fraud has been perpetrated on them. But, this is not then a case of banking. Rather it is a case of play acting, or gift giving, or something like that. It is not the commercial interaction that appearances might indicate.

To return to reality, in actual, historical, fractional reserve banking, there was no gift giving, no play acting. Rather, there was outright fraud. See the readings below on that.

Note, I cannot say that everyone else in society can sue B, or perhaps A, B and C for concocting a scheme that reduces the value of everyone’s monetary holdings. Why not? Because in libertarian theory, you can only own things themselves, not their value. See this on that:

Hoppe, Hans-Hermann and Walter E. Block. 2002. “Property and Exploitation,” International Journal of Value-Based Management, Vol. 15, No. 3, pp. 225-236; http://www.mises.org/etexts/propertyexploitation.pdf

Best regards,

Walter

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7:05 pm on December 29, 2018