19
Jan
2011
I Can Die Now
Here. I am not even going to read this now. I feel like Winston when he gets his hands on the book that explains everything in 1984, and he only wants to sip it in small doses.
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- Driver's Licenses Waive Personal Responsibility and Contribute to Disorder on the Road
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- Driver's Licenses Waive Personal Responsibility and Contribute to Disorder on the Road
- Chapter 13. If America Splits Up, What Happens to the Nukes?
- Chapter 17. Before Roe v. Wade, Abortion Policy was a State and Local Matter
- Chapter 7. A Brief History of Secession Plebiscites in Europe
- Chapter 5. Secession as a Path to Self-Determination
After spending years battling Eurasia (Friedman) they are now the ally, and Krugman claims that he has always been at war with Eastasia (Mises).
You can thank yours truly for your article reaching Krugman. I suspected it would rile his feathers. Now your name is in the friggin NYT! Please note, I don’t believe I was the only one who sent it to him, because I heard around the blogging grapevine that others have as well, and I can’t confirm. But if he did respond to my sending, then color me surprised, because I have been sending him Mises stuff for a while.
I have been a lurker for quite some time, and now the gloves are off! I am going to inject a moral element as well as an economics element as best I can, and so I want to apologize for any potential, or actual, “uncivilized” behavior on my part, nudge nudge, wink wink, but it’s time to get under people’s skins and fix this country before it is too late. People have been too accommodative for too long, too respectful of evil, immoral doctrines, and so to shield you from any embarrassment or guilt, you can just treat me as a crazy fringe guy, who is independent and not connected to you at all. Don’t worry, I LOVE doing this kind of “dirty work”.
The best way to change people’s minds for the better is emphasizing morality in addition to economics. That gets people mad, upset, disoriented, and exposes their core philosophy, which must change if the outer, exterior appearances is going to change.
I mean, I don’t know about you, but I am quite tired of seeing people agreeing with each other on the surface, only to be cordial and nice, when in reality their inner philosophies are like oil and water. It’s time to change the world. Krugman agreeing to debate you is a good step. You’ll win.
This obviously a feint of some kind. Be careful Bob. Be very careful.
Congrats!
Krugman again published my snarky comment:
http://tinyurl.com/4jxtlvo
If you want to get real depressed (and understand the hopelessness of the mass of our opposition), read the other comments. Like this:
You will, I believe, at some point realize that what drives this is belief. Austrianism appeals because it is belief-based; it is a set of principles one holds to despite contradictory evidence. This matters because Palinism, etc. are Evangelically based, as in “authenticity” matters more than the “elitism” of intelligence because belief can’t be contradicted by fact.
He must be reading your blog. Four days after I complain in your comments that Krugman never mentions any names or sources of where he’s getting his Austrian info, we get this.
More proof is needed.
Well, this is certainly good news, I think. The big argument I see being made time and time again on his blog and in the comments section has to do with “empirical evidence.” Still, I would pay good money to see Bob and Paul go at it (gloves off and no holds barred) for, say, 4 hours with 3 intermissions evenly spaced throughout the duration of the event. Toss in a moderator that is agreed upon by both parties, and I would say we’ve got a truly remarkable event.
I would settle, though, if Krugman agreed to thoroughly read a selection of Austrian economics books hand-picked by Bob.
This is like the scene when Apollo sees Rocky punching the heck out of the sides of beef.
The great result is that Krugman for the first time admitted the Austrian story is plausible, it just said there’s no evidence. How was the say? “First they ignore you, then they ridicule you, then they fight you, then you win.” At what phase are we now? I’d say between ridicule and fight; Krugman is acknowledging your existence and taking you half seriously, but not yet “fighting” you.
Secondly, by admitting the Austrian story is plausible, he implicitly admitted that his own conclusions are not necessarily true. He would admit this, but respond that his theory is supported by more evidence. So that’s where the victory will be decided; who will be able to offer more evidence, or maybe less evidence but with no evidence against, will win.
If Krugman were completely honest, then, as a positivist, he MUST accept the consequence that everything he thinks would have to be theoretical only, and could be wrong. This would continue to be the case no matter what observations are made. If his theory is consistent with observations, it does not verify his theory, and if his theory were inconsistent with observations, it would not falsify his theory.
This is what enables him to reject theories he disagrees with philosophically and then justify it by massaging and manipulating observations to make it appear as being inconsistent with the competing theories, and what enables him to accept his own theory and then justify it by massaging and manipulating observations to make them appear as being consistent with his theory.
This is why Krugman cherry picks and ignores crucial data so often in his blog. His ideological blinders causes him to be blind to data that is inconsistent with his theory, even though as a positivist he really doesn’t have to reject his theory no matter what observations are made.
“If Krugman were completely honest, then, as a positivist…”
What makes you think Krugman is a ‘positivist”?
Hi Dr. Callahan, it’s a real pleasure.
Well, my reasons are the fact that he believes the validity of economic principles are borne out of observations, the fact that he tends to hold economic principles as being necessarily theoretical by themselves until subjected to historical data, the fact that he is very antagonistic towards a priori economic ratiocination precisely because it is not observational/empirical based, the fact that he tries to prove/disprove economic theories by reference to (often misleading) historical economic data…
In short, he does not accept that authentic, apodictic knowledge can be arrived at via a priori synthetic propositional analysis, and must be based on empirical observations.
Maurizio,
Did Krugman say the Austrian story was plausible? He said he liked Bob’s model, but it’s not clear to me that Bob’s model is particularly Austrian in that the boom/bust in his example isn’t caused by Fed manipulation of interest rates, fiat money, fractional reserve banking, etc. Indeed, everything that happens in the story is based on voluntary transactions, which arguably means that the story is anti-Rothbardian (in that Rothbard thought you couldn’t have a boom/bust result purely from voluntary transactions).
I don’t mean this as a criticism of Bob’s article, which I think is excellent.
I don’t think rothbard would make that argument. If people voluntarily participated in fractional reserve banking then I’m sure he would argue that would lead to a boom/bust. Rothbard would say that if everyone followed the non aggression principle and homsteaded property rights then there would be no boom/bust because fractional reserve banking is fraudulent.
Dan,
Rothbard’s opposition to FRB is based on arguments that it is inherently fraudulent and hence not really a voluntary transaction. I don’t think the anti-FRB arguments he makes are persuasive, but that would be his escape hatch in that case.
>I don’t think the anti-FRB arguments he makes are persuasive
Not everyone is persuaded by truth. Many are persuaded by emotion, bias, prejudice, status quo, power, etc.
In the case of FRB, it is fraudulent because it generates more then one owner (or owning party) to a single piece of property.
It can easily be seen as fraud for A to grant ownership of a house to B as well as separate party C. FRB is fraudulent for the same reason.
“Not everyone is persuaded by truth.”
But some people are persuaded by nonsense!
Captain Freedom,
When I open a bank account I don’t retain ownership over a particular pile of money (if that were so then you couldn’t have ATMs, branch-banking, etc., and bank accounts would be little more than safety deposit boxes). Rather, what I retain is the right to receive up to the account balance from the bank on demand. If a bank makes this arrangement with several people it isn’t selling the same thing twice anymore than the fact Starbucks sells gift cards which can be exchanged for cups of coffee on demand means that Starbucks is selling the same thing twice.
Bank runs are such an obvious problem that FR banks have obtained special, priviledged protection against them.
Coffee runs are not.
Why do you think that is?
Blackadder: You said: “If a bank makes this arrangement with several people it isn’t selling the same thing twice anymore than the fact Starbucks sells gift cards which can be exchanged for cups of coffee on demand means that Starbucks is selling the same thing twice.”
But imagine if Starbucks were to loan out, say, 90% of its coffee supply to another restaurant (I know, it’s an odd scenario, but let’s go with it). Then you try to redeem your gift card but are told, sorry, no can do, because Starbucks has since run out of the remaining 10% of its coffee supply. Wouldn’t Starbucks have “sold the same thing twice”? Wouldn’t you feel more than a little ripped off?
Jay Bird,
If that happened I would be upset, but it wouldn’t be because I thought Starbucks had sold the same thing twice but because they didn’t honor their agreement.
Further, if Starbucks actually faced this problem it would in all likelihood respond in the same way that airlines do when they overbook a flight and all the passengers show up: offer to buy back the cards/tickets at a premium until you have enough supply to redeem the remaining cards. When I’m waiting for a flight and the airline offers travel vouchers for people who agree to take a later flight, I am not outraged at the airline having sold the same thing twice; rather I consider whether I would like to take the offer and, if not, I stop thinking about it.
Dr. Callahan,
“But some people are persuaded by nonsense!”
I agree. That’s yet another reason why I reject the nonsensical claim that FRB is not fraudulent, because it is possible for a client and a bank to voluntarily agree to defraud the client’s trading partners once he starts to pay with credit that is claimed to be money.
Blackadder: Your point about the airlines and overbooked plane seats is well taken, but if we return to the realm of actual banks, I don’t see how it applies. If a bank has loaned out the money I’ve deposited in it, and those loans (and enough others) go bad, the bank is out of business (leaving aside the possibilities of government bailouts, etc.). How is the bank going to make the situation right, ala the airlines?
Blackadder,
“When I open a bank account I don’t retain ownership over a particular pile of money (if that were so then you couldn’t have ATMs, branch-banking, etc., and bank accounts would be little more than safety deposit boxes).
It depends on the account.
If you open a DEMAND DEPOSIT (checking) account, then yes, you do retain ownership over that particular pile of money. The money is available to you at all times, any time you want to withdraw it. It is your property. Such an account is a promise by the bank to keep YOUR money safe and available with them at all times. It is not an account that sees a transfer of ownership rights.
If you open a LOAN account, then the ownership rights get transferred to the bank. The money is no longer yours. You give the bank your money, and they give back to you a promise to pay at a certain pre-determined date in the future, along with a pre-determined rate of interest. (Note that the existence of interest payments on checking account money does NOT imply the bank owns the money.)
>Rather, what I retain is the right to receive up to the account balance from the bank on demand. If a bank makes this arrangement with several people it isn’t selling the same thing twice anymore than the fact Starbucks sells gift cards which can be exchanged for cups of coffee on demand means that Starbucks is selling the same thing twice.”
Bad analogy. A better analogy would be if Starbucks sold you a giftcard for say $25, redeemable on demand in full, and then sold an identical gift card with the same account information and contract, to someone else. Suppose Starbucks is good with expectations regarding their customer’s spending patterns, and made it so that they correctly time when they expect you to use your card, and when the other guy will use the identical card, so that when you walk in and use some money on the card, Starbucks has enough coffee to give you, and when the other guy uses some money on his card, he too can get a coffee. But, if both of you go in at the same time, and each demand $25 worth of coffee, for a total of $50, then Starbucks cannot give you both enough coffee, because they only have $25 worth. Assuming no Federal Coffee Insurance Corporation (FCIC), assuming no Federal Coffee Reserve, to bail Starbucks out so that their contract with you both can me met, it is clear that Starbucks defrauded you and the other guy. They promised to redeem your card in full on demand, and they reneged because they sold two identical cards to two separate parties.
Jay Bird and Captain Freedom,
I’m going to put my responses as new comments (rather than replies) so as to distinguish the two threads (threading for comments here appears to only work up to a point)`.
You are right though that Dr. Murphy isn’t describing a boom/bust caused by fractional reserve banking. He is showing the weakness in Krugman’s understanding of capital theory. He just showed that if you increase production at the expense of maintaining and repairing the equipment then you will see production fall once the equipment needs to be replaced. They will again have to save and reduce consumption until they have replenished there capital. This scenario was of course voluntary and had nothing to do with fractional reserve banking but also wouldn’t not be a boom and bust. It was just a business mistake.
Also, it was marvelously fortuitous that Bob’s article “Can Austrian Theory Explain Construction Employment?” with all kind of statistics came out today.
http://mises.org/daily/4989
Wow. Looking forward to your and William Anderson’s dissection of this Krugman post. Perhaps it would be a good time to remind your fans about the campaign, just $40,895 to go.
Um, where do Krugman (and many of those leaving comments on his blog) find any evidence that the Austrian view is “sweeping the GOP”? Has John Boehner been quoting Mises or something? For once I find myself fervently wishing that Krugman were actually correct.
The good news: Krugman’s minions are cement-heads.
The bad news: Krugman’s minions are cement-heads, impervious to facts (or reality).
I concur with Bob. Krugman’s commenters do not read his blog to learn about economics, but rather to affirm their own political views. One of which is to be ignorant of economics. Another is to view everything through a simple left-right spectrum, therefore Misesians = evil right-wing teabaggers.
Quiet! That’s the narrative, darn it, and they’re gonna stick with it. Republicans are stupid and don’t deserve serious thought; Republicans like Austrian economics all of a sudden; therefore, Austrian economics must be stupid and doesn’t deserve serious thought. After all, Republicans sometimes say “free markets,” and Austrians like free markets. Republicans don’t like facts, and since Austrians mention a priori, they must not like facts either. Krugman and some of his readers may now better economize their time, confident that Austrians aren’t worth consideration.
I mean, don’t you know that the country has been quite strictly following the advice of Mises and Hayek the last 30 years, and that’s why we’re at where we’re at?
Michael,
Actually, this was inevitable. Conservatives are semi-literate in economics, hence they are waking up to reality first, and now we find ourselves in a partisan battle with the economically illiterate Left.
Libertarian = Liberal who learned economics = Conservative who got arrested.
Your life’s work is done, Bob. Rest in Peace. LOL
Sure, all publicity is good publicity, but at the same time this might be the most intellectually dishonest portrayal of Austrian economics ever to be published by a “reputable” source
I was totally into Murphy until he sold out and went mainstream. I mean it was cool when GMU bloggers started to link him, but now the NY Times? Now I’m gonna have to look for another obscure intellectal bandwagon to jump on.
Have you seen his recent mises posts? He even started using empirical evidence! What a sellout.
Now I really regret that tattoo
That made me laugh out loud.
If he wins a Nobel Prize, I am SO out of here.
Jay Bird,
You say: If a bank has loaned out the money I’ve deposited in it, and those loans (and enough others) go bad, the bank is out of business (leaving aside the possibilities of government bailouts, etc.). How is the bank going to make the situation right, ala the airlines?
We have to distinguish here between bank problems that are an issue of solvency. If a bank makes a bunch of bad loans such that it can’t meet its obligations over the long term, then it will have to be either bailed out or go bankrupt.
On the other hand, it’s possible that a bank could run into problems not because any of the loans it makes don’t get paid back, but because there is an unexpected amount of demand for withdrawals, which temporarily exceed its supply of cash reserves (by analogy, Starbucks might be unable to honor a gift card because lots of people already came in and bought all the coffee it had socked that day, or it might be unable to honor it because the company went out of business; ditto for the airlines).
If a bank faces the second sort of problem, there are ways it can deal with the situation. For example, it could borrow money on a short term basis from other banks (who may have fewer withdrawals than expected) as use that money to cover the withdrawals. Or it might try and induce some of its customers to put off making their withdrawals until a later date. In It’s a Wonderful Life, Jimmy Stewart managed to do this via moral suasion. During the days of free banking in Scotland, banks included a clause in their contracts that allowed them to issue a six month bond at a premium interest rate to the customer instead of cash. This would be analogous to the airline offering people travel vouchers if they agree to take a later flight.
If you are interested, I would recommend the following podcast with George Selgin, which addresses many of these issues in depth.
Thanks for the link. I’ll check it out.
Blackadder
Are you in favor of free banking, central banking, or something else?
Also do you believe this scenario should be illegal? I put 100 deck chairs in storage but only take out 10 at one time. The owner of the storage facility realizes this and decides to loan out the other 90 for parties. He makes some money on the rentals and I’m none the wiser. Then one day I decide to move and go to get my chairs but there are only 10 in the storage at that time. Can the owner say that it isn’t fraud because if I just waited I could get the chairs later?
Dan,
I’m inclined towards Hayek’s idea of competing currencies, but my views aren’t set in stone.
If your agreement was that the chairs should stay in storage then yes that would be a violation of the contract and hence illegal in that sense. But if you agree to let him loan out 90 of the chairs (in exchange for which he pays you to keep the chairs with him rather than you paying him to store them) then there is nothing fraudulent about that.
I personally don’t have a huge problem with free banking because I think it would eventually result in 100% reserve banking through competition, but I do still believe it would lead to booms and busts.
Do you think grain warehouses should also be allowed to function in this fractional reserve manner as long as they all agree to do so or do you believe in the bailment laws for them?
Dan,
If people wanted to enter into such an agreement regarding grain warehouses they should be allowed to do so. What would be the basis for saying they can’t?
The historical evidence suggests that free banking would not lead to 100% reserves. Banks in Scotland, for example, during the free banking period kept around 3% or so in reserves. Even in countries where fractional reserve banking is illegal in practice you end up with less than 100% reserves. And from a theoretical point of view, it’s not clear how you could have banks with 100% reserves (you could have something called a bank, but it would basically be a large safety deposit box; I don’t see how it could serve the financial intermediation role that is central to banking).
There wouldn’t be a problem as long as the grain was loaned to the warehouse. If it was deposited there with the ability to redeem in full at any time and then some or all of the grain is loaned out two people would have a claim on the same amount of grain at the same time. Since it would be impossible to meet this obligation it is illegal and considered fraud. The only reason banks can get away with this is court rulings in the 1800’s decided that money deposited in a checking account was a loan to the bank and not a bailment. The fallacy I see is having a loan that can be redeemed in full at any time even if a portion of it was already loaned out.
If I deposit money in a bank that I can redeem at any time and then the bank turns and loans out a portion of that to somebody else, who can demand redemption at any time, then how can we both be paid if we decide to take it all out? It is physically impossible for us both to own the same money at the same time. I know they typically will not run into a problem as long as everybody doesn’t want their money at the same time but as soon as a run happens someone is going to get screwed. I know you don’t see it as fraud if the bank customers agreed to this but what about a business man who takes a check from a customer of a fractional reserve bank with the idea that he can redeem it for money at any time. If he goes to deposit the check after a bank run how is he not a victim of fraud. I see the intent needed for this to be fraud fulfilled as soon as the bank gives a claim on the same money to more than one person at the same time.
Now if I loan the bank the money then I have nothing to complain about. So the distinction is whether I can redeem the money on demand or after the loan matures. If on demand then as soon as they loan a portion out we have more than one claim on the same money.
As far as whether free banking would lead to 100% reserves, I believe that it would tend to move in that direction. In the cases you talk about the banks could always turn to the State for a bailout if a run took place. It is my understanding that free bankers believe the banks would have to stand on their own two feet. So if you remove the safety net then the odds of some banks running reserves at 3% is slim. Another bank could run reserves at 10% and siphon all the gold or what have you from the 3% bank through the clearing houses. The banks with the higher reserves would all have this ability and that would tend to drive the reserve requirements higher.
There would always be banks who are willing to risk loaning out demand deposits unless we were on a gold coin standard but that is why I favor 100% reserves and charging those banks with fraud if they are caught.
Having 100% reserves doesn’t prevent the financial intermediation role of banking. Nothing prevents a bank from offering cd’s or whatever and loaning that out. They just wouldn’t be allowed to loan out demand deposits that could be withdrawn at any time. The way I see it is you would have loan banks and storage banks or deposit banks. What is wrong with that?
The only real difference in our views is I see two people owning the same thing at the same time as an impossibility and if tried as fraud and you view it as fine as long as both parties agree to it. Either way I would rather live in a world of free banks or 100% reserve banks over what we have now.
There wouldn’t be a problem as long as the grain was loaned to the warehouse. If it was deposited there with the ability to redeem in full at any time and then some or all of the grain is loaned out two people would have a claim on the same amount of grain at the same time. Since it would be impossible to meet this obligation it is illegal and considered fraud.
The obligation is only to pay out grain that is actually demanded. In the case of banks, not only is it not impossible to meet this obligation, but banks virtually always meet this obligation.
Consider the airline again. A ticket is a claim to a seat on a plane. If an airline sells more tickets for a flight than there are seats on the plane, then there are more claims to seats on the flight on than there are seats. That doesn’t mean that its impossible for the airline to meet its obligations or that what it’s doing is illegal. It’s only if everyone who has bought a ticket actually shows up and exercises their claim that this is a problem. And even in this case the airline can solve the problem by getting some people to not exercise their claim to a seat in exchange for a travel voucher and a seat on a later flight.
Similarly, if the total claims on funds for a bank exceed the amount of funds it keeps in reserve this is not in itself a problem. It’s only a problem if the amount of funds actually claimed exceeds the reserves. And as in the airline case, if that happens the bank could get people to agree to not exercise their claims by offering the equivalent to a travel voucher and later flight (e.g. a short term bond with a high interest rate).
I know you don’t see it as fraud if the bank customers agreed to this but what about a business man who takes a check from a customer of a fractional reserve bank with the idea that he can redeem it for money at any time. If he goes to deposit the check after a bank run how is he not a victim of fraud.
If the businessman accepts a check as payment he is assuming the risks involved with that form of payment. In a world without deposit insurance one of these risks is a bank run.
As far as whether free banking would lead to 100% reserves, I believe that it would tend to move in that direction. In the cases you talk about the banks could always turn to the State for a bailout if a run took place.
If banks always got bailed out when there were runs, then there wouldn’t be runs (this is why you don’t see bank runs for accounts covered by FDIC).
Having 100% reserves doesn’t prevent the financial intermediation role of banking. Nothing prevents a bank from offering cd’s or whatever and loaning that out. They just wouldn’t be allowed to loan out demand deposits that could be withdrawn at any time.
What would you think of my ten minute CD idea (where the bank treats one tenth of its deposits as CDs with a ten minute term ending at 12:01, 12:11, 12:21, etc., another tenth as CDs with terms ending at 12:02, 12:12: 12:22, etc., and so on)?
“The obligation is only to pay out grain that is actually demanded. In the case of banks, not only is it not impossible to meet this obligation, but banks virtually always meet this obligation.”
I understand that if people do not demand their money then the bank will not run into a problem. What I am saying is that if everyone wanted their money at the same time it would be impossible for the banks to meet their obligations because more than one person has a claim on the same money. Now you might not think there is a problem with this but it is none the less true. I personally see that as fraud for the reasons I stated above.
The airline analogy doesn’t fit because when there is a bank run the only way you are getting your money back is if the State takes money from someone else to give back to you through the FDIC or whatever. I understand that the banks can try to pull a Its a Wonderful Life move but if unsuccessful they have no way to pay back everyone they owe. The FDIC was created specifically to prevent bank runs from happening because your ideas couldn’t stop a run once it starts.
“If the businessman accepts a check as payment he is assuming the risks involved with that form of payment. In a world without deposit insurance one of these risks is a bank run.”
So if I write a check knowing full well I don’t have the money in the account it isn’t fraud. Or do you believe that is fraud but when banks do the same thing its ok. The banks know full well when they run on fractional reserves that they can’t possibly meet all their demand obligations at the same time. I see this as fraud and you don’t. We are just talking in circles at this point.
“If banks always got bailed out when there were runs, then there wouldn’t be runs (this is why you don’t see bank runs for accounts covered by FDIC).”
Come on be serious. Ever heard of banks being allowed to suspend specie payments? You are not seriously arguing that the banks in Scotland were running free banking without any privileges, are you?
“What would you think of my ten minute CD idea (where the bank treats one tenth of its deposits as CDs with a ten minute term ending at 12:01, 12:11, 12:21, etc., another tenth as CDs with terms ending at 12:02, 12:12: 12:22, etc., and so on)?”
I would say good luck earning the interest needed to meet your loan payment. I think it is a stupid business decision but I don’t think there is a problem with offering loans on a very short term basis. I don’t have a problem with loan banking regardless of how idiotic the loans they make are. I have a problem when my bank takes my money, says I can get it back at any time, then loans my money to someone else who can also take the money at any time. It is impossible for everyone to take their money at the same time when multiple people own the same money.
As far as I can tell there will be no full agreement on this issue for us. I see frb as fraud and you don’t. I don’t think you are stupid for this belief, just wrong. I would guess you see it in reverse. Still I would love to see free banking with no State privileges than what we have now. I just think that 100% reserves is a better system morally and economically. I also would love to see what kind of fractional reserves would be held in a free banking system. I think it would move towards 100% reserves. I’m guessing you would see it moving towards lower reserves like the 3% in Scotland.
What I am saying is that if everyone wanted their money at the same time it would be impossible for the banks to meet their obligations.
That’s true. It’s also true that if everyone who holds a ticket on an overbooked flight shows up the airline won’t be able to seat them all.
The airline analogy doesn’t fit because when there is a bank run the only way you are getting your money back is if the State takes money from someone else to give back to you through the FDIC or whatever.
No, if a bank is fundamentally sound it can make up the difference by borrowing from other banks or by offering incentives to customers to put off withdrawing the money. Neither of these requires the state taking money from anyone else.
The FDIC was created specifically to prevent bank runs from happening because your ideas couldn’t stop a run once it starts.
As a matter of historical fact lots of bank runs were stopped by precisely these methods. Where they weren’t stopped, it was generally because people feared that the bank was insolvent even over the long term (for example, because too high a proportion of its loans weren’t going to be paid back). In other words, what did the bank in was not that it was borrowing short and lending long; if it had received its funds in term loans instead of demand deposits it still would have gone under (restrictions on branch banking and so forth did exacerbate this problem). The fact that people didn’t have to wait to get there money back only meant that the bank went bust quicker.
So if I write a check knowing full well I don’t have the money in the account it isn’t fraud.
No, when I write a check I am warranting that there are sufficient funds in the account to cover the check. When I open a bank account, by contrast, the bank does not say explicitly or implicitly that it is going to keep cash reserves equal to my balance in a designated fund somewhere. Indeed, the fact that they are paying me interest on the account indicates that they are not doing this.
The banks know full well when they run on fractional reserves that they can’t possibly meet all their demand obligations at the same time.
The bank’s customers also know this, as do the merchants who accept payment with checks, etc. Fractional reserve banking is not a secret.
Suppose I buy insurance (health, life, auto, whatever). Insurance companies do not keep 100% reserves. That is, if everyone with a home insurance policy with a given company had their house burn down all at once, the company would not have enough funds to cover all the claims. Does that mean that all insurance is fraudulent?
I would say good luck earning the interest needed to meet your loan payment. I think it is a stupid business decision but I don’t think there is a problem with offering loans on a very short term basis.
I’m not sure you understand. The system I’m talking about is functionally equivalent to the current fractional reserve system. Since banks in the current system have no trouble meeting payments in 99.99999% of circumstances, they wouldn’t have trouble in my proposed alternative either.
Again we are just talking in circles.
“No, if a bank is fundamentally sound it can make up the difference by borrowing from other banks or by offering incentives to customers to put off withdrawing the money. Neither of these requires the state taking money from anyone else.”
I have already agreed the banks can do these things. Why do you keep bringing this up? We are in agreement here.
Let me try again to explain my position. Lets say I am the only customer of a bank. I put in $100 that I can redeem immediately. Then the banks goes and lends $90 of my money to someone else who can also use the money immediately. Now if both of us go to withdraw $60 it is impossible for the bank to pay us both at the same time. I understand that the State can intervene or they can borrow from another bank to cover the shortfall but the simple fact is they can’t possibly give us both our money at the same time without these measures. If nobody bails the bank out of this situation one of us is getting screwed.
The airline might overbook but that doesn’t mean that in order to refund my money they need to first go borrow from someone else or turn to the State for a bailout.
I find it hard to take an argument serious that compares insurance to checking accounts.
“I’m not sure you understand. The system I’m talking about is functionally equivalent to the current fractional reserve system. Since banks in the current system have no trouble meeting payments in 99.99999% of circumstances, they wouldn’t have trouble in my proposed alternative either.”
I understand your position which makes this so frustrating. You can’t seem to grasp our view on the difference between a demand deposit and time deposit. My argument is that a deposit can’t be both at the same time. Its one or the other.
I’ve gotten all I wanted out of this though. I understand your position and just disagree with it. I’m not trying to convince you that 100% reserves is correct. I just wanted to flesh out your view. I see it, understand it, and I disagree with it. If you can’t see or understand the other side then so be it.
The only other thing I would want to know is do you still believe that the Scotland banks were operating with free banking, without any State privileges, or was that system not what the free bankers are suggesting. I find it hard to believe that Horowitz points to Scotland to show how successful his system would be.
Captain Freedom,
You say: If you open a DEMAND DEPOSIT (checking) account, then yes, you do retain ownership over that particular pile of money.
Is it your view that this is how checking accounts actually operate, or are you saying that this is how anything called a checking account must operate if it isn’t to be fraudulent?
If the former, then you are just wrong. If I retained ownership over a particular pile of money, then it wouldn’t be possible for me to withdraw money from my account except by going to the specific bank where my money was being held, nor would anyone else be able to cash a check from me except by going to that location.
If the latter, why can’t consenting adults agree to whatever they want, and call it whatever they want? If I want to give someone money in exchange for a right to receive an equivalent amount of money from him or his associates on demand, and we choose to call that a “checking account” what is wrong with that?
>Is it your view that this is how checking accounts actually operate, or are you saying that this is how anything called a checking account must operate if it isn’t to be fraudulent?
The latter.
>If the latter, why can’t consenting adults agree to whatever they want, and call it whatever they want? If I want to give someone money in exchange for a right to receive an equivalent amount of money from him or his associates on demand, and we choose to call that a “checking account” what is wrong with that?
Suppose A and B consensually agree with each other to defraud C. Can it be said that because A and B consensually agreed with each other, that their actions are somehow justified, and any criticism of their behavior is “authoritarian” and unjust? Of course not. A and B are engaging in unjust and fraudulent behavior.
The way it works with FRB, notwithstanding the fact that not everyone who holds a demand deposit account are aware that their money has been loaned out (there was a poll in England not too long ago, and it showed that over 70% of checking account clients believe that the banks do not loan their money out and keep it with them at all times), then even if a checking account client was aware of, and accepted, the bank to loan his money out, then this does not at all mean that there is no longer any fraud taking place. The fraud just gets transferred.
Transferred to whom you may ask? The fraud is transferred to those merchants and trading partners who are being paid by the demand deposit holder. The demand deposit holder presents payment to a merchant as if it were cash (for example a debit card payment, a banker’s check, a regular check, or, in the case of many business to business transactions, a direct bank transfer, in short, any *transferable claim to money*, which is the equivalent of money, and most importantly which FINALIZES the exchange between demand deposit holder and merchant.
Now, this final payment is supposed to be, and is claimed by the demand deposit holder, and believed by the merchant, to be money. But it isn’t. It is actually a form of risky security, a credit transaction. The demand deposit holder is giving to the merchant not a claim to money, but a claim to the credit of a bank. The demand deposit holder is giving the merchant something that, in principle, could be defaulted on by the bank. It is not money, but a credit. THAT is where the fraud resides if the demand deposit holder and bank “agree” to loan the demand deposit money out.
In between the time the demand deposit holder pays the merchant with credit, and before the time the merchant seeks actual money from the client’s bank, there is a POSITIVE credit risk, however small, however unlikely, that the merchant can be told that the bank does not have the money.
Money is not supposed to have ANY positive credit risk at all. Money is the final, zero credit risk commodity. Money is the final, absolute means of payment that fully and completely settles all debts (credits). There should not be any outstanding credit exposure when one is paid in money. Once one is paid in money, credit goes to zero, credit risk goes to zero. That is what is SUPPOSED to happen in a non-fraudulent money exchange.
But because of that credit risk, however small, because the thing the demand deposit gives the merchant is NOT money, even though it is presented by the demand deposit holder as money, even though it is believed by the merchant to be money, even though finalized payment is supposed to be MONEY, not credit, when payment is finalized, then someone is getting defrauded, and here it is the merchant.
Now, at this point it is no argument to claim that OK, so let’s suppose that the merchant “knows what’s going on”, because he understands banking, and he too accepts that he is not getting money, but a credit, and fully agrees to accept it. Well, then the fraud will just get transferred once more to someone else, i.e. to the merchant’s trading partners.
At some point in the “trading chain”, either the seller or the buyer will present and understand the payment and receipt to be money and not a credit. It is hard to see this because so many people have lived so long under the delusion that out of habit and custom, influenced by the banks and the government of course, hardly anyone even stops to think about the fraudulent practice taking place. It is so entrenched, so enmeshed in society, that almost everyone does not see that what they are using, presenting, and contracting for as money, is not actually money, but credit/debt.
The fraud ORIGINATES in the banking system, with the support of government.
Now, at this point it is no argument to claim that OK, so let’s suppose that the merchant “knows what’s going on”, because he understands banking, and he too accepts that he is not getting money, but a credit, and fully agrees to accept it. Well, then the fraud will just get transferred once more to someone else, i.e. to the merchant’s trading partners.
It’s not a matter of supposition. Merchants pretty clearly *do* understand that a check might bounce, etc. But it’s not clear how the fraud is supposed to get “transferred” to the merchants trading partners. If I pay for something with a check and then the merchant goes out and buys something else, he’s not going to pay for it with my check. He’ll pay with cash, or with a credit card, or with his own check, but however he does it it will be an independent transaction.
In any event, for a transaction to be fraud it is not sufficient for one of the parties to be ignorant about some of the downside risk to the transaction. Maybe I want to buy gold and, not being the brightest bulb, I think that gold can’t decrease in value. It doesn’t follow that it is fraud to sell gold to me, still less does it follow that the entire gold market is fraudulent because you might be able to draw a six degrees of Kevin Bacon type connection between my transaction and all other transactions in gold. Fraud requires the intent to deceive.
>It’s not a matter of supposition. Merchants pretty clearly *do* understand that a check might bounce, etc.
I caught you. My trick worked like a charm.
Since you correctly isolated the regular check from the other means of payment, you understand the difference between money and a credit instrument. I put that in there to see if you would say hey wait a minute, that’s not really money or a transferable claim to money, but rather a credit instrument. You’re right about that, but then this shows you understand that transferable claims to money, such as debit card payment, banker’s check, etc, are fundamentally different from promises to pay based on a client’s credit worthiness.
After all, the client can cancel the check, and the merchant can lose out if your check bounces, for the check is not a final payment. It will be final once the ownership is transferred from the client to the merchant. The exchange of goods for a check is not a finalized trade from the client’s and merchant’s perspective when it comes to the money involved. The ownership title of the actual money is still in the client’s name. It will not be until the merchant sends the check to the bank, asks for the funds, will the ownership title transfer from client to merchant, that is, if the client’s account actually has the money. Thus, the check is not a transferable claim to money, but rather a credit instrument of the client. The client is promising the merchant they have the money. The merchant considers the credit worthiness of the client when accepting or rejecting the check.
When a merchant accepts a debit card payment on the other hand, or whatever other means of payment that is a transferable claim to money, then that IS a final payment, from the client’s perspective. At that point, the client essentially says, “We’re done”. What I gave you is final payment. The merchant’s dial up debit machine sends a message to the client’s bank requesting verification that the funds are there, and the bank sends a signal back saying yes, we have the funds, and the bank then transfers ownership of that money to the merchant, and as far as the client and merchant are concerned, they are done. That means that the thing the client used to pay the merchant is a transferable claim to money. The ownership title of the money changed from client to merchant. The bank electronically debits the client’s account and credits the merchant’s account.
However, from the time that the bank tells the merchant the money is theirs, and the time that the merchant actually withdraws cash if they ever decide to withdraw any, what the merchant has is not actually a transferable claim to money that exists, but rather a bank’s promise to pay, that is, a credit instrument.
So the client did not actually pay with a transferable claim to money, but a credit instrument. That is fraudulent.
Now, the merchant will almost certainly get his money if he tries to withdraw it from the bank, but there is a non-zero CREDIT risk associated with it, which in principle could be reneged upon. It could be because the bank may not have the money if there is a bank run.
>But it’s not clear how the fraud is supposed to get “transferred” to the merchants trading partners.
By transferring the thing that is acted upon as if it were money, when in reality it is credit. In other words, by not withdrawing the funds from the bank, and just exchanging promises to pay from one person to another.
>If I pay for something with a check and then the merchant goes out and buys something else, he’s not going to pay for it with my check.
If you pay by debit, he could write a check off his account that is supposed to be increased by your debit payment.
>In any event, for a transaction to be fraud it is not sufficient for one of the parties to be ignorant about some of the downside risk to the transaction.
All that is necessary is for there to be more than one owner for the same property. When it comes to money in frb, there is more than owner.
>Maybe I want to buy gold and, not being the brightest bulb, I think that gold can’t decrease in value.
You mean gold may decrease in terms of paper dollar exchange ratios. Yes, that could happen. But the value of gold itself is more stable than paper dollars.
>It doesn’t follow that it is fraud to sell gold to me, still less does it follow that the entire gold market is fraudulent because you might be able to draw a six degrees of Kevin Bacon type connection between my transaction and all other transactions in gold.
If there is an ownership claim for an amount of gold for person A, and there is also an ownership claim for that same gold for person B, where each person is told that their gold is kept in their name, safe and available at all times, would that be fraud?
>Fraud requires the intent to deceive.
The government is considering making illegal any public calls for people to remove their demand deposit money from their banks that the banks say is theirs.
The banks pay interest on demand deposit money they are supposed to keep safe and available at all times for you, which means they pay you to provide you with a service, which is actually to not make your money safe and available at all times.
If any other business besides banks did with other people’s property what banks do with other people’s money, they would be considered engaging in fraud.
Captain Freedom,
What I said was that paying with a check was different than paying in cash. I didn’t say anything about debit cards. Why you think that acknowledging the difference between paying with a check and paying in cash commits me to the long string of inferences you draw about paying with a debit card is unclear.
I mean, it’s not as if the things you note about debit card payments aren’t known to merchants as well (right now, of course, bank accounts are guaranteed by the FDIC, but before this I’m pretty sure merchants realized that bank runs were always a possibility).
Can I assume that you don’t have a bank account?
I noticed you did not respond to anything I said, which can only mean you have nothing to say, which means your position is currently not justified and not defended.
>What I said was that paying with a check was different than paying in cash. I didn’t say anything about debit cards. Why you think that acknowledging the difference between paying with a check and paying in cash commits me to the long string of inferences you draw about paying with a debit card is unclear.
The difference is what separates money from credit. That’s the point.
>I mean, it’s not as if the things you note about debit card payments aren’t known to merchants as well (right now, of course, bank accounts are guaranteed by the FDIC, but before this I’m pretty sure merchants realized that bank runs were always a possibility).
Not all merchants know this, so stop pretending that “everyone knows”. A recent poll in the UK for example proved that over 70% of the population at large think that their banks have their demand deposit money on hand with them at all times.
And even if merchants “knew”, that doesn’t make it not fraudulent, because SOMEONE in the chain will be unsuspecting.
>Can I assume that you don’t have a bank account?
Can I assume you have never studied bank theory nor economics?
I noticed you did not respond to anything I said, which can only mean you have nothing to say, which means your position is currently not justified and not defended.
Uh, no. That doesn’t follow.
Your comment drew a faulty inference from what I said, and then drew a bunch of further inferences from that first inference. In such a case, it isn’t necessary for me to respond to each and every one of your points. I can just note that the first inference doesn’t follow and leave it there.
Not all merchants know this, so stop pretending that “everyone knows”.
I suspect that the vast majority of merchants pre-FDIC knew about the possibility of bank runs. And if there were some merchants who did not know this, the blame for their ignorance would rest on themselves, rather than on the people they traded with.
Can I assume you have never studied bank theory nor economics?
You may not.
The reason I ask whether you have a bank account is that based on what you are saying if you did have a bank account every time you wrote a check, used a debit card, drew interest on your account, etc., you would be committing fraud. Which is bad.
However, if you don’t want to divulge personal information I can understand that, so let me ask this instead: suppose that instead of the current system banks were set up where account holders may banks very short term loans (say, ten minutes), with the terms staggered such that 10% ran from 12:01-12:10, 10% from 12:02-12:11, and so forth. When the loan came due it would automatically be renewed for a new ten minute period unless you explicitly say you don’t want to renew. The bank would then keep enough cash on hand to pay back all the loans that are due at any particular time (which would be about 10% of the total). If you wanted to withdraw money from your account, this would simply mean that you wouldn’t renew your loan for the full amount, but would renew for the original amount less what you had withdrawn (if your loan term wasn’t up until 1:40 and you came in at 1:33 the bank would graciously make you an interest free loan for the next seven minutes for that amount).
From what I can tell, this would avoid all the Rothbardian objections to fractional reserve banking, but would have the exact same consequences. But maybe I’m missing something. Do you think this system would still be fraudulent, and if so why?
>Uh, no. That doesn’t follow.
Then why didn’t you respond at all to anything I said?
>Your comment drew a faulty inference from what I said, and then drew a bunch of further inferences from that first inference. In such a case, it isn’t necessary for me to respond to each and every one of your points. I can just note that the first inference doesn’t follow and leave it there.
Which “faulty infererence”?
>I suspect that the vast majority of merchants pre-FDIC knew about the possibility of bank runs.
And post FDIC? The introduction of FDIC does not alter the question of whether or not FRB is fraudulent.
> And if there were some merchants who did not know this, the blame for their ignorance would rest on themselves, rather than on the people they traded with.
See, this is the recourse to those who lack a foundation to their arguments. You start to attack the victims. Just because the defrauded may be “idiots”, that does not mean fraud is not taking place.
>The reason I ask whether you have a bank account is that based on what you are saying if you did have a bank account every time you wrote a check, used a debit card, drew interest on your account, etc., you would be committing fraud. Which is bad.
You’re right, I am committing fraud. But then so is everyone else who does what I do, which is virtually everyone. The fraud is legal however, and it is almost impossible to avoid it and then still take part in society at a reasonable level. The banks are given the privilege to misappropriate their client’s money, whether the clients know about it or not.
Are you actually admitting now that it is fraud, or are you just trying to attack me by inferring that since my arguments implicate me as well, I must therefore be dishonest and contradict myself and deny wrongdoing, which will allow you to pounce and say AHA? I ADMIT that my behavior violates traditional legal principles.
But your position is that FRB is NOT fraud, so you cannot honestly call my behavior fraudulent and be consistent in your arguments. Either you are changing your mind, or you are probably just wanting to attack me because you’re running out of defenses.
>However, if you don’t want to divulge personal information I can understand that, so let me ask this instead: suppose that instead of the current system banks were set up where account holders may banks very short term loans (say, ten minutes), with the terms staggered such that 10% ran from 12:01-12:10, 10% from 12:02-12:11, and so forth. When the loan came due it would automatically be renewed for a new ten minute period unless you explicitly say you don’t want to renew. The bank would then keep enough cash on hand to pay back all the loans that are due at any particular time (which would be about 10% of the total). If you wanted to withdraw money from your account, this would simply mean that you wouldn’t renew your loan for the full amount, but would renew for the original amount less what you had withdrawn (if your loan term wasn’t up until 1:40 and you came in at 1:33 the bank would graciously make you an interest free loan for the next seven minutes for that amount).
>From what I can tell, this would avoid all the Rothbardian objections to fractional reserve banking, but would have the exact same consequences. But maybe I’m missing something. Do you think this system would still be fraudulent, and if so why?
These accounts you are hypothesizing are NOT demand deposit accounts. They are loan accounts with very short term maturities, and are “rolled over” again and again. If a client opened up such an account of ten minute term to maturities, then what is happening is that the ownership claim is getting transferred to the bank for 10 minutes, after which time the client has the right, but not the obligation, to withdraw his money and end the rolling over process. He could NOT withdraw his money before the 10 minutes are up.
At the end of each 10 minute lapse in time, the ownership of the money gets transferred back the client, at which point he has the option to withdraw, or leave it in and reinvest it in a new 10 minute loan, at which time the bank would again take ownership of the money.
The key here is that whoever has the ownership rights to the money at any given time, the other party CANNOT spend it or invest it or take use control of it. Only ONE party has the right to do so at any given time, because this account is a loan account, where the ownership of the money is transferred from client to bank, and then after 10 minutes, the ownership rights go back to the client, who has the option to reinvest or withdraw.
Since this is NOT a demand deposit account, it means that during the middle of the 10 minute periods, the bank can do whatever it wants with the money, because it’s their money. The ownership rights were transferred from client to bank. The client exposes himself to credit risk for each of those 10 minute periods. After 10 minutes are up, the client expects to get his money back plus interest, at which point the bank MAY default, which the client accepted because he transferred the ownership rights of the money to the bank. It did not remain his property.
Now, if the client invested his money in the bank in these successive series of 10 minute loan contracts, then should the agreement be “if the client doesn’t say anything after any given 10 minute period, then the bank will go ahead and reinvest the outstanding unwithdrawn principle plus interest for another 10 minutes”, then this contract is similar, in principle, to a continuous loan with an American style call option. I am assuming of course that 10 minute intervals is roughly equivalent to an exercisable at any time call option.
At any rate, these 10 minute contracts are loans, not demand deposit contracts, which means the bank CAN loan that money out for the 10 minutes, but it has to make sure that it has the outstanding principle plus interest available to the client after each 10 minute period, or it could anticipate the client’s withdrawal patterns and invest and sell accordingly. Either way, the contract is a loan, and so the ownership rights get transferred from client to bank. That’s the important part of all this. The important part is answering the question “Which party has ownership rights to this money right now?”
If the ownership rights belong to the client, as it is in a demand deposit account, then the bank does NOT have the legal right (legal meaning according to the framework I am defending) to loan that money out.
If the ownership rights belong to the bank, as it is in loan contracts, and as it is in your example, then the bank DOES have the legal right to loan that money out.
Then why didn’t you respond at all to anything I said?
Because I have better things to do with my time (I hope you aren’t one of those people who thinks that because someone has gotten tired of arguing with him that means he has won the argument).
Which “faulty infererence”?
That by acknowledging the difference between paying with cash and paying by check I was saying anything about paying with a debit card.
>I suspect that the vast majority of merchants pre-FDIC knew about the possibility of bank runs.
And post FDIC? The introduction of FDIC does not alter the question of whether or not FRB is fraudulent.
Post-FDIC bank runs are not a serious issue because deposits are guaranteed (the only reason to have a bank run is if you think you might otherwise not be able to get your money, and if your deposits are guaranteed that’s not a worry). Of course there is always the possibility of a governmental collapse, but in that case cash wouldn’t be riskless either.
See, this is the recourse to those who lack a foundation to their arguments. You start to attack the victims. Just because the defrauded may be “idiots”, that does not mean fraud is not taking place.
Suppose you sell me some beachfront property. Then a hurricane comes along and destroys my house. I say “hey, I didn’t realize my house was at risk of being hit by a hurricane. You defrauded me!” Even if it’s true that I didn’t realize this possibility, that doesn’t make the transaction fraudulent. The fact that beachfront property might get hit by a hurricane isn’t some secret. It’s public information, and if I didn’t know it that’s not your fault. Likewise, the fact that banks operate on a fractional reserve basis is not a secret. It’s public information available to anyone who takes the time to inform themselves on the issue. If they choose not to do so they can’t claim that they’ve been defrauded on that account.
You’re right, I am committing fraud. But then so is everyone else who does what I do, which is virtually everyone. The fraud is legal however, and it is almost impossible to avoid it and then still take part in society at a reasonable level.
‘Everyone else is doing it’ is not a good excuse for defrauding someone. Neither is the fact that it is legal. Not using checks, debit cards, etc., would certainly inconvenient, but it’s hardly impossible. I know people who are on the Dave Ramsey budget program, which requires them to pay for most everything in cash. You could keep your pay in a safety deposit box, or in CDs, or under your mattress. In fact, I’d say that the main inconveniences that come from not having a bank account are that you don’t get to take advantage of the benefits that come from fractional reserve banking. In other words, you don’t earn interest on your account, you can’t use ATMs, etc.; but it’s not like you would have access to these things if fractional reserve banking were banned. It’s just that no one else would have them either.
With regard to my very short-term loan hypothetical, it sounds like you are saying that this would be fine and wouldn’t be fraudulent. Functionally, though, this situation would be exactly like fractional reserve banking. The total value of the bank accounts is, say, $100 million; the bank loans out $90 million and keeps $10 million in reserves. If fractional reserve banking leads to a boom/bust cycle, this system would as well.