Is Fractional Reserve Banking Fraudulent? Part 2

The first post I published pondering fractional reserve banking resulted in a couple of comments and also further discussion with Carl, so I decided to write a part two.

I want to keep the focus on the question of whether or not fractional reserve banking is fraudulent. One commenter, Less Antman, makes the point that it’s not fraudulent if people knowingly enter into voluntary relationships with banks that practice fractional reserve banking. The bank never claims that the note is a warehouse receipt for property, it is merely a promise to pay.

In the original article from the first post, Carl agreed that “fractional reserves do not constitute a breach of contract when and where that practice is specified.” However, Carl has since reconsidered this view and pointed me to Issue 112 for further explanation.

The article he referred to is “Titles in Search of Property: Should Fractional Reserve Banking Come to an End?” Carl explains how his understanding of the issue was further developed after reading a Hans-Herman Hoppe article, “Fiduciary Media” published in 1998 in THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS.

Hoppe goes deeper into the nature and reality of property itself. Here are two excerpts from Hoppe that set up the relationship of bank notes to actual property:

Since, both B [the bank] as well as A [the depositor], count the same quantity of money simultaneously among their own assets, they have in effect conspired to represent themselves in their financial accounts as owning a larger quantity of money than they actually own: that is, they have become financial impostors, [pp. 26-27]... Fractional reserve banking does not increase the quantity of existing property (money or otherwise), nor does it transfer existing property from one party to another. Rather, it involves the production and sale of an increased quantity of titles to an unchanged stock of property (gold); that is, the supply of and the demand for counterfeit money and illegitimate appropriation. [Hoppe, et. al., p. 33]

AND

[F]iduciary media represent new and additional titles to or claims on an existing and unchanged stock of property. ... They represent an additional supply of property titles, while the supply of property has remained constant. It is precisely in this sense that it can be said of fiduciary media that they are created out of thin air. They are property-less titles in search of property. This, in and of itself, constitutes fraud, .... Each issuer and buyer of a fiduciary note (a title to money uncovered by money), regardless of what he may believe, is in fact - objectively - engaged in misrepresentation for the purpose of personal gain. [Hoppe, et. al., p. 22]

Hoppe has framed the issue clearly in terms of property actually existing in reality. Hoppe says "two individuals cannot be the exclusive owner of one and the same thing at the same time." Therefore fractional reserve banking makes claims that contradict reality.

A person can certainly make a claim that something exists, such as Santa Claus, but that doesn’t mean it exists. Someone who says this is denying reality. This is why Hoppe says even a voluntary contract for fractional reserve banking is not legitimate. It makes the claim that a property title to something exists when it does not.

Now, of course (and Carl goes into this in the article) there is the fact that until people actually agree that this is true, the claim does “exist” as far as how people behave. The practice would only end once people understood fractional reserve banking as a fraudulent claim on property (just like we now understand slavery). But the point I’m focusing on here is the idea of whether or not Hoppe’s point is true, thereby making fractional reserve banking fraudulent.

What do you think?

Yes, Government Does Get in the Way

Issue 30 of The Voluntaryist was published in February, 1988, and in it Carl reports on a new federal immigration law requiring employers to have a new government form on file for each employee. The form is titled “Employment Eligibility Verification Form” and is known as the I-9.

Oh, the I-9. In my family, this form is known as the infamous I-9.

It’s infamous because it’s a symbol of the government regulation that slowly sucked away my husband’s desire to continue growing his computer company. It just wasn’t worth the continued frustration.

You have probably read my story about life experiences that caused me to become a voluntaryist. Well, my husband, John, has his own experiences, which were running parallel to mine.

See, at the time I began homeschooling our kids, he decided to start his own business. So there we were as a family, basically starting a new life, doing our own thing in every way.

My story shows the wall I hit in dealings with the government immediately, but John’s experience was more like the frog in the boiling water - except that he knew the water was getting hotter and he was slowly being cooked.

As he became more successful, he moved from being home-based, found a site to lease and began hiring employees. He took more risks, had more success and hired more employees.

He worked long hours. I would call him sometimes at 9 p.m. and ask him when he was coming home and he would say the last time he looked at the clock was 6 p.m. He enjoyed his work and was having a great time.

But gradually the government regulations started piling on. Forms to fill out, taxes to pay, and oh, here’s another change in the law that will affect payroll, etc. Eventually the company reached a size where many more regulations kicked in and he was advised to send someone to a special class to make sure all the government regulations were being followed.

This is when he learned he was supposed to file the I-9 forms.

What really teed him off was that he could get fined for not having them on file. Not fined for actually hiring an “illegal,” which is bs in itself, but just for not having the proper form on file.

I clearly remember him coming home and talking about this form. He was so frustrated. He could literally see his productivity go down. He had to work even more hours to keep up with the requirements piling up on him.

Yet he kept pushing on. For a time he still felt like it was worth it. But eventually he just wore out and when he had an offer to sell, he took it. He worked for that company for a while and after a couple more stints in corporate world, he took a break and thought about what he wanted to do and is now back to running his own business again.

But this time it’s much different. He plans to keep this company a one-person business. He periodically turns down work. He does not want to get caught up in the government mess again that comes with hiring employees.

Issue 30 also contains “A Vignette from History: Rose Wilder Lane,” which describes how she changed her life in order to avoid supporting the New Deal. I shared that with a friend who said, “Oh, she ‘went 'Galt,’” When I heard that, I started to realize that my husband has essentially done his own version of “going Galt.”

How many other people are out there like him? How many other people are in a position where they could create jobs but simply won’t do so because the government gets in the way far too much?

I’m not sure I really want to know.

Ratifying the Constitution Kicking and Screaming

Do you know people who really revere the Constitution? People who believe most of our current problems are due to not following the Constitution? People who say everything would be fine, if only the country would follow the Constitution?

If so, then you may want to show them Carl’s article In Issue 30 of The Voluntaryist, “To All Patriots and Constitutionalists: Some Critical Considerations on the United States Constitution.”

In this article Carl asks questions and makes several points about the Constitution in an effort to determine whether it actually holds any valid authority.

One of the more interesting tidbits of history I learned is that Carl says Pennsylvania did not have a quorum for a ratifying convention. When I did some searching to find out more about that I discovered that apparently supporters dragged Anti-federalists to the statehouse to get that quorum!

I knew the Constitution was controversial at the time, but I wasn’t aware that it actually came down to such literal knock-down drag-out battles.

It's interesting to hear such reverence about it now, considering how many people must have not been very hot to replace the Articles of Confederation.

Show this to the constitutionalists you know. Perhaps it will start something – I mean in terms of an interesting discussion of course, and not a knock-down drag-out.

Is Voluntaryism Treasonous?

Carl Watner asks this question in Issue 30, in an article titled “If This Be Treason, Make the Most of It!” and this excerpt shows how he answers the question:

“All of this leads me to ask: Is voluntaryism treasonous? Are voluntaryists guilty of treason and/or sedition? Is THE VOLUNTARYIST a seditious publication?

Undoubtedly the answers to these questions are "Yes," particularly if treason and sedition are viewed in their broadest scope. Although treason in the United States requires overt action (levying war or in adhering to the enemy) against the State - actions which voluntaryists and THE VOLUNTARYIST are clearly not guilty of – we are definitely guilty of attempting (through education and other peaceful, non-violent means) to weaken the power of statism in this country and every other country in the world. It is in this sense that we are treasonous and seditious: we oppose not only specific states, (such as the United States) but the very concept of the nation-state itself. Without the State there would be no compulsory institution to betray. One is not accused of treason when one quits Ford Motor Co. and goes to work for General Motors. But it is generally considered treasonous to renounce one's citizenship (as when one attempts to become a naturalized citizen of a country that your country is at war with) because allegiance to the State was historically deemed perpetual and immutable.”

When I think about the forming of our current nation-state, I’ve always wondered what it must have been like for the “founding fathers” and everyone else living at the time who supported the break from England.

There they were, working so hard to break free from King George and of course if they had lost, many would have likely been killed for treasonous acts. But they won. So what did they do? Well, they created their own nation-state and a document that specifically includes treason as a crime against the new nation-state.

This tells us that the battle was not really about liberty as a general concept; it was only about liberty from the King of England. Yet, we are not taught about it that way. We are told it was indeed about liberty in general – right after we are told to stand up and pledge allegiance to the nation-state.

Maybe they really had no choice. Maybe this was simply a necessary step in the evolution of civilization. After all, they did succeed in moving from the idea of a monarchy as legitimate rule.

But all they accomplished was to create a special class of people who still claim the power to rule over others. As a result they needed a treason clause to maintain and legitimize this aggression. Too bad they couldn’t see the truth that if your idea of a free society necessitates a treason clause, then something is not quite right.

This is why I’m drawn to voluntaryist ideas. Voluntaryism is working to develop community where people are free to voluntarily associate with others; where there isn't much need at all to even discuss the idea of treason. Sure, people may still hold personal allegiances and create contractual relationships but the difference is that everyone would be free from the (forced) rule of others.

So if you believe in the legitimacy of nation-states, then yeah, I guess that is a treasonous idea.

Is Fractional Reserve Banking Fraudulent?

Issue 29 of The Voluntaryist has a very detailed article titled “Free Banking and Fractional Reserves.” The article is basically a back and forth discussion between Carl Watner and Lawrence H. White over points White makes about fractional reserve banking in an essay titled “Free Banking and the Gold Standard.”

Carl’s intent was to investigate whether or not fractional reserve banking would play a part in a free banking system. If fractional reserve banking is fraudulent, the practice would be excluded in a free market.

One point White and Watner discuss is the idea of freely contracting on the matter. Some consumers may want to negotiate 100% reserves and others would go ahead and accept fractional reserve banking, perhaps as a way of avoiding fees for every service. Watner agrees that explicit contracts, even for fractional banking, would be legitimate but he also discusses what might happen in regards to property ownership if there is no explicit agreement between the parties.

So…much of the discussion centers on who actually owns the funds that are deposited in a bank. Is there such a thing as conditional ownership on funds deposited or held by a bank? Should a bank be able to hold less than 100% in that case? Or does that mean they are taking and using property that is not theirs?

Carl is very concerned that even explicit contracts agreeing to fractional reserves are a problem. Why? Because of the effect on third parties. He quotes Rothbard to explain:

“Commercial banks - that is, fractional reserve banks - create money out of thin air. Essentially they do it in the same ways as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, when they circulate as equivalent to money among the public.”

Therefore, if fractional reserve banking is the same as counterfeiting, then even people who do not consent are affected by inflationary practices of fractional reserve banking.

I am confused in one regard here because it seems to me that in a free banking system, people who did not want to participate in fractional reserve banking could just refuse to use that bank or to trade with others who use that bank. So wouldn’t the problem take care of itself? Or am I missing something here?

Perhaps it's still a problem because banks and people will potentially get so intertwined with each other that it would be impossible to remain uninvolved in fractional banking practices.

I would be very interested in any comments from those of you more knowledgeable than I am on this topic.

A Plan to Attain a Voluntary Society

Discussions about a voluntary society often arise from a discussion on a particular issue, for example, education, or maybe Social Security. If the discussion continues long enough, eventually someone asks for a plan - a specific plan to explain in detail how that issue can be solved or accomplished through voluntary interactions.

For many people, a plan validates an idea. They are used to plans because politicians are always offering plans. They don’t understand that the lack of a central plan is a free society’s strength.

The point is to not confine society to a singular plan, but to allow individuals the freedom to create and choose from a wide variety of plans that meet various needs and desires.

This is why I try to focus discussions not on plans but on principles.

In Issue 29, “What is Our Plan?” Carl shares an editorial, written in 1844 by slavery abolitionist Nathaniel Peabody Rogers for a publication titled HERALD OF FREEDOM where the author describes the focus on principles rather than specific plans:

“(T)o be without a plan is the true genius and glory of the anti-slavery enterprise. The mission of that movement is to preach eternal truths, and to bear an everlasting testimony against the giant falsehoods which bewitch and enslave the land. It is no part of its business to map out its minutest course in all time to come, - to furnish a model for all the machinery that will ever be set in motion by the principle it is involving. The plan and the machinery will be easily developed and provided, as soon as the principle is sufficiently aroused in men's hearts to demand the relief of action.”

During the closing of Libertopia 2011, Stefan Molyneux gave an interesting demonstration of what it would be like for someone offering a plan back in the days of slavery in answer to the question, “But who will pick the cotton?” At 13:44 in the video, you can see how ridiculous a real plan would sound to those living at the time:



The abolitionists knew it was not about providing a plan for who will pick the cotton, the point was the principle that slavery is wrong.

So, right now it’s important to spread the principles that provide the foundation for a voluntary society using any and all peaceful means available. Then, as society begins to understand, accept and universally apply these principles, specific (and varied) plans will follow.

Here’s another excerpt from Carl’s editorial section from Issue 29, “What are we for? – What Do We Believe” that lends some basic ideas worthy of passing along to others:

“THE VOLUNTARYIST is seldom, if ever, concerned with personalities; but we are concerned with ideas. Our interest is in the enduring aspects of libertarianism. Among these ideas we would include the concept that taxation is theft; that the State is an inherently invasive institution, a coercive monopoly, that war is the health of the State; that power corrupts (especially State power); that there is no service demanded on the free market that cannot be provided by market methods; and that the delineation and implementation of property rights are the solution to many of our social and economic ills. Nor to be overlooked is our insistence on the congruence of means and ends; that it is means which determine ends, and not the end which justifies the means.”

The absence of a singular confining plan is the entire point of a voluntary society, so rather than trying to come up with complicated plans to fit all needs, perhaps we should stick to the simpler task of clarifying basic principles.

Don’t be fooled though. Just because it’s simpler, doesn’t mean it’s easier.