I get questions on Austrian economics and libertarianism from time to time. If they are polite, I always respond, even if briefly, because I have lots of e mail messages to deal with. On occasion, I receive queries that I think worthwhile to share on this blog, such as the one below. Be warned: if you ask me what I consider an important question, I will feel free to post it on LRC along with my response, but on an anonymous basis.
To: Walter Block
Subject: Against Fiduciary Media
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? SG
Thanks for your kind comments about that article.
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
Bagus, 2003; Bagus, Howden and Block, 2013; Barnett and Block, 2005, 2008, 2009; Baxendale, 2010; Block, 2008; Block and Caplan, 2008; Block and Garschina, 1996; Block and Humphries, 2008; Block and Posner, 2008; Davidson, 2008; Davidson and Block, 2011; Hanke, 2008; Hazlitt, 1979; Hollenbeck, 2013, 2014; Hoppe, 1994; Hoppe, Hulsmann and Block, 1998; Howden, 2013; Huerta de Soto, 1995, 1998, 2001, 2006, 2010; Hulsmann, 1996, 2000, 2002a, 2002b, 2003, 2008; Murphy, 2010; North, 2009; Polleit, 2010; Reisman, 1996, 2009; Rothbard, 1975; 1990, 1991, 1993; Salerno, 2010A, 2010B, 2011.
Note: I’d like to have an exhaustive list of Austro-libertarian publications attacking fractional reserve banking as possible. If there is anything I should add to this list, please let me know.
Bagus, Philipp. 2003, ‘The Commons and the Tragedy of Banking’, November 12, http://mises.org/story/1373
Bagus, Philipp, David Howden and Walter E. Block. 2013. “Deposits, Loans and Banking: Clarifying the Debate,” American Journal of Economics and Sociology, Volume 72, Issue 3, pages 627–644, July; http://onlinelibrary.wiley.com/doi/10.1111/ajes.12023/abstract; http://bastiat.mises.org/2013/07/fractional-reserve-banking-paper/
Barnett, William II and Walter E. Block. 2005. “In defense of fiduciary media— a comment; or, what’s wrong with “clown” or play money?” Quarterly Journal of Austrian Economics; Vol. 8, No. 2, Summer, pp. 55-69; http://mises.org/journals/qjae/pdf/qjae8_2_4.pdf
Barnett, William and Walter E. Block. 2008. “Time deposits, dimensions and fraud,” Journal of Business Ethics; www.WalterBlock.com/publications; http://www.springerlink.com/content/100281/?k=walter+block&sortorder=asc&v=condensed&o=20; www.WalterBlock.com/publications
Barnett, William and Walter E. Block. 2009. “Financial Intermediaries, the Intertemporal-Carry Trade, and Austrian Business Cycles; or; Crash and Carry: Can Fraudulent Time deposits lead to an Austrian Business Cycle? Yes.” Journal Etica e Politica / Ethics & Politics; Vol. XI, No. 1, pp. 455-469; http://www2.units.it/~etica/2009_1/BARNETT_BLOCK.pdf
Baxendale, Tony. 2010. Free Banking, the Balance Sheet and Contract Law Approach; March 15; http://www.cobdencentre.org/2010/03/free-banking-the-balance-sheet-and-contract-law-approach/
Block, Walter and Bryan Caplan. 2008. “Walter E. Block versus Bryan Caplan on Fractional Reserve Banking.” Nov 1; https://www.lewrockwell.com/block/block110.html
Block, Walter and Kenneth M. Garschina. 1996. “Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homoginization Process,” Review of Austrian Economics, Vol. 9, No. 1, 1995, pp. 77-94; http://www.mises.org/journals/rae/pdf/rae9_1_3.pdf.
Block, Walter and John Humphries. 2008. “Humphries vs Block on fractional reserve banking.” November 17; http://alsblog.wordpress.com/2008/11/17/fractional-reserve-banking/
Block, Walter versus Eric Posner. 2008. “Posner vs. Block on fractional reserve banking.” November, 29; https://www.lewrockwell.com/block/block114.html
Davidson, Laura. 2008. “Fractional Reserve Banking Is Indeed Fraudulent,” November 17;
Davidson, Laura and Walter E. Block. 2011. “The Case Against Fiduciary Media: Ethics Is The Key,” The Journal of Business Ethics. Vol. 98, Issue 3, pp. 505-511;
http://www.springerlink.com/content/j76323752648720g/; http://dx.doi.org/10.1007/s10551-010-0590-2; 10.1007/s10551-010-0590-2
Hanke, Steve. 2008. “Banking Crises: Plus Ça Change…” GlobeAsia, November, pp. 168-169; http://www.freemarketfoundation.com/Hanke%5CBanking%20Crises–Plus%20%C3%87a%20Change,%20November%202008.pdf
Hazlitt, Henry. 1979. “Gold versus Fractional Reserves Part 1 .” The Freeman. May;
Hollenback, Frank. 2013. “Insuring Deposits, Ensuring Insolvency.” July 24;
Hollenback, Frank. 2014. “The Fraud in Fractional Reserve Banking.” November 26; http://us2.campaign-archive2.com/?u=7e6cc2f6072b7ebfaa847047f&id=189c14aa12&e=53fc31c1bb
Hoppe, Hans-Hermann. 1994. “How is Fiat Money Possible? or, The Devolution of Money and Credit,” Review of Austrian Economics, 7(2), pp. 49-74.
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
Howden, David. 2013. “A Simple Math Question for Bankers.” December 28;
Huerta de Soto, Jesús. 1995. “A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian Perspective,” Review of Austrian Economics, 8(2), pp. 25-38.
Huerta de Soto, Jesús. 1998, ‘A Critical Note on Fractional-Reserve Free Banking’, The Quarterly Journal of Austrian Economics 1(4), 25-49.
Huerta de Soto, Jesús. 2001. “A Critical Note on Fractional Reserve Free Banking,” The Quarterly Journal of Austrian Economics, Vol. 1, No. 4, Fall, pp. 34-35
Huerta de Soto, Jesús. 2006. Money, Bank Credit and Economic Cycles (Ludwig von Mises Institute, Auburn AL.)
Huerta de Soto, Jesús. 2010. “Economic Recessions, Banking Reform, and the Future of Capitalism.” http://mises.org/daily/4817
Hülsmann, Jorg Guido. 1996, ‘Free Banking and the Free Bankers’, Review of Austrian Economics 9(1), 3-53.
Hulsmann, Jorg Guido. 2000. “Banks Cannot Create Money”, The Independent Review: A Journal of Political Economy, vol. 5, no. 1, summer, 101—110; http://www.independent.org/pdf/tir/tir_05_1_hulsman.pdf
Hulsmann, Jorg Guido. 2002a. “Free Banking and the Free Bankers.” Review of Austrian Economics. Vol. 9, No. 1. pp. 3-53; http://www.mises.org/journals/rae/pdf/rae9_1_1.pdf
Hulsmann, Jorg Guido. 2002b. “Free Banking Fractional Reserves: Reply to Pascal Salin.” Review of Austrian Economics, Vol. 1, No. 3.
Hulsmann, Jorg Guido. 2003. “Has Fractional-Reserve Banking Really Passed the Market Test?,” Independent Review 7/3, Winter, 399-422. http://www.independent.org/publications/tir/article.asp?a=90
Hülsmann, Jorg Guido. 2008. The Ethics of Money Production Auburn AL: Ludwig von Mises Institute
Murphy, Robert P. 2011. The Fractional-Reserve Banking Question.” June 14; http://mises.org/daily/4499
North, Gary. 2009. “What Is Money? Part 5: Fractional Reserve Banking.” October 10;
Polleit, Thorsten. 2010. “The Faults of Fractional-Reserve Banking.” December 23;
Reisman, George. 1996. Capitalism. Ottawa, Il.: Jameson Books; pp. 954-963
Reisman, George. 2009. “A Pro-Free-Market Program for Economic Recovery,” November 20; http://mises.org/daily/3870
Rothbard, Murray N.  1975. America’s Great Depression (Sheed and Ward, Kansas City).
Rothbard, Murray N. 1990. What Has Government Done to Our Money?, Auburn, AL: Ludwig von Mises Institute; http://www.mises.org/rothbard/rothmoney.pdf
Rothbard, Murray N.  1991. “The Case for a 100 Percent Gold Dollar,” In Search of a Monetary Constitution, Leland B. Yeager, ed., Cambridge, MA: Harvard University Press, pp. 94-136, and Auburn, AL: Ludwig von Mises Institute. See also “The Logic of Action One” pp. 364-384; http://mises.org/story/1829; http://mises.org/rothbard/100percent.pdf
Rothbard, Murray N.  1993. Man, Economy, and State. Ludwig von Mises Institute, Auburn, AL
Rothbard, Murray N. 1988. The Myth of Free Banking in Scotland, Review of Austrian Economics; http://mises.org/journals/rae/pdf/RAE2_1_15.pdf
Salerno, Joseph T. Salerno. 2010A. Money, Sound and Unsound. Auburn, Ludwig von Mises Institute
Salerno, Joseph T. 2010B. “White contra Mises on Fiduciary Media,” May 14;