Rational Capitalist on Facebook

Monday, February 15, 2010

Boom-Bust, Part 3

In Part 1 and Part 2, I argued that the current economic crisis is an instance of a classic inflation-depression cycle caused primarily by government engineered credit expansion or inflation. Additionally, I argued that modern economists like Chairman Bernanke's inability to grasp the ultimate nature of the crisis derives from the profession's positivist epistemological bent in which principles are eschewed in favor of myopic empiricism and statistical modeling of the latest data points.

The positivist method helps not only explain the antipathy towards fundamental generalizations regarding the crisis, but partially accounts for the general hostility toward private banking and the gold standard. This is due to the creation of what I dubbed the "mythical narrative of the 19th century" in which the positivist observes the occurrence of boom-busts in the 19th century, despite the presence of a gold standard and supposed laissez faire conditions, concluding that gold and private banking must not prevent the boom-bust cycle. In other words, the inability to properly abstract the relevant economic principles, which explain outcomes in varying contexts, renders these intellectuals incapable of reaching a full understanding.

As Murray Rothbard conclusively demonstrates in A History of Money and Banking in the United States, the government has been intimately involved in the monetary system since the inception of the country, leading to one disaster after another. The 19th century saw an almost constant political tug of war between hard money advocates and those advocating inflationary policies - a battle ultimately culminating in the formation of the Federal Reserve. It is certainly not my intention to recount the entire history here. However, I believe there are several major takeaways to help better understand the evolution of our current system.

Historically, it appears that government intervention in the monetary system takes two general forms. The first form I will call direct intervention where, for example, the government pyramids paper money on top of specie. The second form of intervention represents a default by the government to perform its legitimate and necessary function as a protector of property - which I will call misintervention. I claim that this misintervention took two primary forms. First, during various crises, it failed to uphold banks contractual obligations to redeem in specie. Second, through various legal precedents, it failed to legally define property in such a way as to effectively outlaw the practice known as fractional reserve banking, i.e., legally distinguish between a deposit and a loan contract.

Therefore, it is my contention that government intervention (or misintervention) caused the banking crises and panics of the 19th century, not the gold standard per se. In fact, it was gold that kept any semblance of price stability and which helped lead to phenomenal economic expansion. To observe this latter point graphically, see Peter Bernholz excellent book, Monetary Regimes and Inflation, wherein he charts consumer prices from 1750 to the present in four different countries. The chart reveals that prices remained virtually flat for 150 years (under a gold standard) and then spike exponentially after 1900 after the advent of the Federal Reserve. (Also, see this
chart at nowandfutures.com.) Bernholz states that:

All hyperinflations in history occurred after 1914 under discretionary paper money standards except for the French case during the Revolution of 1789-96, when a paper money standard was introduced with the assignats. (I discussed hyperinflation during the French Revolution at length in this post)
In fact, since the creation of the Fed in 1913, the dollar has lost approximately 95% of its purchasing power. So, in fact, even given the various panics which occurred in the 19th century, the monetary environment under gold was a bastion of stability compared to what has occurred under central banking. It's tempting to stop there, however, it's important to understand why even under this form of gold standard, periodic panics and major disruptions rocked the financial system, because these panics and bank runs are always cited as justification for central banking.

Below I propose four major categories of government intervention or misintervention which I hold, in essence, accounts for virtually every panic of the 19th century.

1. Direct creation and pyramiding of paper money on top of specie by the government

2. Private bank pyramiding of paper money on top of specie (fractional reserve banking) legally sanctioned by the government's inability to properly distinguish a deposit from a loan

3. Government suspension of banks contractual obligation to redeem in specie during various panics

4. Statutory decrees setting the the relative value of gold to silver (bimetallism) rather than allowing prevailing free market rates (see my post
Where's Grover Cleveland When You Need Him which discusses how government policy, in this case the Sherman Silver Purchase Act, led to the panic of 1893.)

Of course, the particular details in each instance varied, however, I believe the root causes derive from these categories. A general pattern tended to occur repeatedly throughout the 19th century:

Depositors would exchange gold with a bank for banknotes redeemable in specie. The bank would create more banknotes than it had deposits to make loans - a process known as fractional reserve banking. For example, since not everybody wanted their money at the same time, the bank could create say $100 of paper for every $10 of gold in the bank. Fractional reserve based credit expansion led to temporary booms for the same reasons cited in Part I, and all was well, until everyone wanted their money at the same time - a phenomena known as a bank run. Bank runs were precipitated by banks issuing too much paper money followed by a panic that the bank would not be able to fully redeem their depositor's gold. Then, during the crisis phase, the state and federal governments repeatedly allowed banks to suspend redeemability thus encouraging banks to expand credit over and over again, knowing that they would be bailed out if depositors ever panicked.

Rothbard writes:

The War of 1812-1815 had momentous consequences...The government therefore encouraged the formation of new and recklessly inflationary banks in the Mid-Atlantic, Southern, and Western states, which printed huge quantities of new notes to purchase government bonds. The federal government thereupon used these notes to purchase manufactured goods in New England.
The number of new banks exploded and pyramid ratios (the ratio of bank notes outstanding to actual specie) were close to 20-1 in some states.

The monetary situation meant that the United States government was paying for New England manufactured goods with a mass of inflated bank paper outside the region. Soon, as the New England banks called upon the other banks to redeem their notes in specie, the mass of inflating banks faced imminent insolvency.
Rothbard explains the "fateful decision" then made by the government.

As the banks all faced failure, the governments, in August 1814, permitted all of them to suspend specie payments-that is, to stop all redemption of notes and deposits in gold or silver-and yet to continue in operation. In short, in one of the most flagrant violations of property rights in American history, the banks were permitted to waive their contractual obligations to pay in specie while they themselves could expand their loans and operations and force their own debtors to repay their loans as usual.

This decision had far reaching consequences in terms of so-called moral hazard.

From then on, every time there was a banking crisis brought on by inflationary expansion and demands for redemption in specie, state and federal governments looked the other way and permitted general suspension of specie payments while bank operations continue flourish. It thus became clear to the banks that in a general crisis they would not be required to meet the ordinary obligations of contract law or of respect for property rights, so their inflationary expansion was permanently encouraged by this massive failure of government to fulfill its obligation to enforce contracts and defend the rights of property.

It is obvious that the governments failure to uphold the contractual obligation to redeem in specie encouraged reckless inflationary expansion on the part of many banks. If the government had simply forced the banks unable to redeem to "incur immediate insolvency and liquidation" the problem would likely have been limited in scope. However, suspensions became the norm not the exception. Rothbard writes:

Suspensions of specie payments informally or officially permeated the economy outside of New England during the panic of 1819, occurred everywhere outside of New England in 1837, and in all states south and west of New Jersey in 1839. A general suspension of specie payments occurred throughout the country once again in the panic of 1857.
Again, in this instance we see the pattern discussed above wherein banks would massively inflate leading to price inflation and a temporary boom followed by a bust, a run on banks, and government sanctioned suspension of specie redemption. It was not only private banks that engaged in inflationary operations. The first attempt at a central bank occurred in 1791 when the First Bank of the United States was chartered. It's inflationary policies are discussed in detail in Rothbard. That bank's twenty year charter failed to be renewed in 1811, but that did not stop the formation of the Second Bank of the United States in 1816.

With the nation emerging from the War of 1812 in monetary chaos, and "with banks multiplying and inflating ad lib, checked only by the varying rates of depreciation of their notes" and "with banks freed from redeeming their obligations in specie, the number of incorporated banks" continued to increase. Rothbard writes:

It was apparent that there were two ways out of the problem: one was the hard-money path...The federal and state governments would have sternly compelled the rollicking banks to redeem promptly in specie, and, when most of the banks outside of New England could not, to force them to liquidate. In that way, the mass of depreciated and inflated notes and deposits would have been swiftly liquidated, and specie would have poured back out of hoards...and the inflationary experience would have been over.
Instead, the Second Bank of the United States was established to "support the state banks in their inflationary course rather than crack down on them." The Second Bank struck a sweetheart deal with the state banks in which it agreed to issue mass amounts of credit "before insisting on specie payments from debts due to it from the state banks." In exchange for this "massive inflation" the state banks "graciously" agreed to resume specie payments and "moreover, the Second Bank and the state banks agreed to mutually support each other in any emergency, which of course meant in in practice that the far stronger Bank of the United States was committed to the propping up of the weaker state banks."

It can be seen that from the start, the government formed an intimate and symbiotic relationship with private banks - a relationship that continues today. Rothbard quotes William H. Wells, an opponent of the Second Bank, in saying that the bank was

ostensibly for the purpose of correcting the diseased state of our paper currency by restraining and curtailing the over issue of bank paper, and yet it came prepared to inflict upon us the same evil, being itself nothing more than simply a paper-making machine.
The Second Bank "launched a spectacular inflation of money and credit" which began to come apart in 1818 when "the enormous inflation of money and credit, aggravated by the massive fraud, had put the Bank of the United States in real danger of going under and illegally failing to sustain specie payments." The bank undertook a massive contraction of credit and

The result of the contraction was a massive rash of defaults, bankruptcies of business and manufacturers, and liquidation of unsound investments during the boom. There was a vast drop in real estate values and rents...and public land sales dropped greatly as a result of the contraction..

Sound familiar? Fortunately, President Andrew Jackson, a hard money advocate, was able to veto recharter of the Second Bank in 1831 and set about to completely "disestablish" the bank. (It's also interesting, although beyond the scope of this post, that a system known as the Suffolk System emerged from about 1825-1858 and functioned as a free market central bank. In other words, the Suffolk Bank in Massachusetts was willing to redeem or clear the notes of other banks (at par) as it required outside banks to maintain sufficient deposits with Suffolk.)

The Civil War would fundamentally alter the monetary system forever. The dire straights of the federal government during the war led to the issuance of the unbacked "greenback" and ultimately paved the way for the
Legal Tender Cases, the National Bank Act of 1863, and ultimately the formation of the Federal Reserve itself in 1913. In other words, the disasters caused by government intervention and misintervention begot calls for more government intervention followed by more disasters justifying creation of the Federal Reserve, the abolition of gold, fiat currency, unlimited government deficit spending, chronic inflation and an even more dramatic inflation-depression cycle!

In connection to the inflationary policies of both public and private banks, a further question necessarily arises - should it be legal for banks to create more bank notes than for which they have deposits? Should fractional reserve banking be legal in the first place?

In a
previous post, I followed Jesus Huerta de Soto book, Money Bank Credit and Economic Cycles, and Rothbard's, The Mystery of Banking, to offer a brief history and explanation of the essentials of fractional reserve banking including definitions of various terms: bailment, regular and irregular deposit contract, etc. as well as sketch their arguments as to why it should not be upheld by the courts. (Also, Michael Labeit has an excellent synopsis of Jesus Huerta de Soto's argument against fractional reserve banking. Those posts should be read with the following.)

To summarize, when you deposit money in a demand checking account today, the bank obligates itself to give you your money whenever you ask. However, the bank does not literally keep your money laying around. Under fractional reserve banking, the banking system takes the $100 you deposited and can create about $1,000 in loans. In other words, banks only need to keep about 10% of their depositors money in reserve. [Bank A takes $100, holds $10 in reserve and lends $90. Borrower deposits the $90 in Bank B and that bank sets aside $9 in reserves and lends $81, and so on. Ultimately, at the end, the original $100 will have turned into $1,000 of demandable funds even though only $100 actually exists.] Similarly, in the 19th century, one would deposit gold in a bank and receive a banknote redeemable in gold. Through the loan process, the banks would create more banknotes than they held in gold. This is what led to the temporary inflations and bank crises I described above.

How is it possible that the bank could simultaneously obligate itself to make the gold available on demand while loaning it out? Should banks be allowed to engage in this practice?

I believe this issue has its roots in the philosophy of law and, in particular, the proper distinction between a deposit contract and a loan contract. When you enter into a "deposit" contract, one does not transfer title of his property. The counter party provides a safekeeping function. (In the post, I describe the Bank of Amsterdam 150 year run as a 100% deposit bank.) This should be distinguished from the "loan" contract (which gives rise to separate loan banking), in which you transfer legal ownership of something, like money, to another party and allow them to use it in any way they wish (or in a way specified in the contract). In this case, you are transferring title to someone else in exchange for future goods specified in the contract such as the amount of money plus interest. These transactions are based on two very distinct concepts. In one case, you actually pay someone a fee to perform the service of safekeeping property to which you retain title. In the other case, you transfer ownership of property in the present in exchange for future goods, i.e., for payment in the future.

I hold that it is a contradiction for the government to uphold a conflation of these distinct legal concepts. How exactly can a court reconcile a contract in which the parties agree that title to property is and is not transferred at the same time? This would be similar to asking the courts to uphold a contract where a painter is contracted to paint one's house both blue and red at the same time. In other words, prohibition of this practice is not a question of violating the freedom of contract, it is a question of the legal validity and status of a contract based upon a contradictory, and ultimately, fraudulent property claim. [update: by "prohibition", I mean that the courts should refuse to uphold a contradictory contract which would effectively end the practice.]

This issue came to a head in several court cases in the 19th Century. In The Mystery of Banking, Rothbard writes:
Thus, in England, the goldsmiths, and the deposit banks which developed subsequently, boldly printed counterfeit warehouse receipts, confident that the law would not deal harshly with them. Oddly enough, no one tested the matter in the courts during the late seventeenth or eighteenth centuries. The first fateful case was decided in 1811, in Carr v. Carr. The court had to decide whether the term debts mentioned in a will included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled that it did. Grant maintaned that since the money had been paid generally into the bank, and was not earmarked in sealed bag, it had become a loan rather than a bailment.
In the follow up case of Devaynes v. Noble, Rothbard writes:

one of the counsel argued, correctly, that "a banker is rather a bailee of his customer's funds than his debtor...because the money in...[his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up." But the same Judge Grant again insisted-in contrast to what would be happening later in grain warehouse law-that "money paid into a banker's becomes immediately a part of his general assets; and he is merely a debtor for the amount."

The seminal ruling was made by Judge Lord Cottenham in the 1848 case Foley v. Hill. De Soto writes about the case:

At the end of the eighteenth century and throughout the first half of the nineteenth, various lawsuits were filed by which depositors, upon finding they could not secure the repayment of their deposits, sued their bankers for misappropriation and fraud in the exercise of their safekeeping obligations. Unfortunately, however, British case-law judgments fell prey to pressures exerted by bankers, banking customs, and even the government, and it was ruled that the monetary irregular-deposit contract was no different from the loan contract, and therefore that bankers making self-interested use of their depositors' money did not committ misappropriation.

In the decision, Lord Cottenham wrote:

Money, when paid into a bank, ceases altogether to be the money of the customer; it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker's is money known by the customer to be placed there for the purpose of being under the control of the banker. It is then the banker's money; he is known to deal with it as his own...The money placed in the custody of a banker is to all intents and purposes the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it; he is not answerable to the customer if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of the customer, but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the customer, is when demanded, a sum equivalent to that paid into his hands.
This ruling would make fractional reserve banking a permanent fixture on the monetary scene. De Soto offers compelling arguments to demonstrate not only the inflationary boom-bust effects that follow from fractional-reserve banking but also to demonstrate that "from a legal point of view, it is impossible to equate these two contracts" (the monetary irregular deposit contract and the loan or mutuum contract). He writes:

We therefore conclude that past attempts to legally justify fractional-reserve banking with respect to demand deposits have failed. This explains the ambiguity constantly present in doctrines on this type of bank contract, the desperate efforts to avoid clairty and openness in its treament, the generalized lack of accountability and ultimately (since fractional-reserve banking cannot possibly survive economically on its own), the fact that it has been provided with the support of a central bank which institutes the regulations and supplies the liquidity necessary at all times to prevent the whole setup from collapsing.

It should be noted that the primary culprit today is not fractional reserve banking per se. If bank notes are ultimately redeemable in specie, and the government upholds banks obligations to redeem, the practice would necessarily be limited (see the Suffolk Bank mentioned earlier). In other words, fractional reserve banking would have the potential to create a moderate business cycle but it would be nowhere near the magnitude witnessed today. This can be seen empirically in charts of prices throughout the 19th century as compared to price charts in the 20th century under fiat money. This follows from the fact that today, unlike the 19th century, there is no obligation on the part of banks to redeem in specie. The government, through the Federal Reserve system, can print arbitrary amounts of money which it has effectively done. Fractional reserve banking serves only to multiply this ever increasing pile of money created by virtue of government deficit spending.

For example, if the banking system has $100 then fractional reserve banking can multiply it to $1,000. If the government creates another $10,000, then fractional reserve banking can multiply it to $100,000, and so on. However, if the government had not created the extra money, the money stock would have been limited to the $1,000. In other words, it is the arbitrary creation of money out of thin air which is the primary culprit in today's boom bust cycles. That is not to say that fractional reserve banking should be legal. I hold that it should not be upheld by the courts for the reasons I cited. This would simply lead to a 100% reserve gold standard and a separation of deposit and loan banking.

What I have attempted to show is that today's destructive inflation-depression cycle is an instance of a reoccuring pattern that has played out over centuries. The Federal Reserve system, rather than being the solution, has exacerbated the very causal factors which allegedly led to its creation. When analyzed from an integrated historical perspective, the various problems related to the 19th century monetary system can be seen to have stemmed from government intervention and misintervention - problems which could have readily been solved by a full 100% gold reserve private banking system. Instead, the United States has gone in the exact opposite direction leading to the predictably unfortunate and ever worsening circumstances we find ourselves in today.

In Part 4, I will analyze the so-called "tools" that the Federal Reserve claims will allow it to reign in its massive creation of reserves.


Kevin said...

After my earlier comment, I held off replying, as I wanted to hear your overall take on FRB, fiat money, etc before exploring the matter more deeply.

I think we are in agreement on the following: 1) government manipulation of the money supply has been and is the cause of the boo/bust cycle. 2) FRB exaggerates the effects of this boom/bust cycle.

My concern, however is that you place too much emphasis on specie as a solution. Even within your examples you demonstrate that a specie-based system has not prevented the government (and I would argue banks independently as well) from creating periods of inflation naturally culminating in major busts. My problem with this is that it hides the culprit, which is not fiat, but supply-manipulation.

If one wishes to argue for specie, simply stating that it will prevent the government from manipulating the supply (resulting in boom-bust) is not a sufficient position to take, since clearly it does not do so (and never has historically). Also, such a position necessitates that any system-wide solution that uses specie should be held up against a solution that uses fiat.

In the end I’m quite content with specie or fiat, which is why the emphasis you place on specie bothers me. I’m much more interested in addressing the systemic issues by which government manipulates the money supply. Today, those levers are government debt, the Federal Reserve System, and FRB. If we converted to specie backed currency but left the rest in place we would accomplish very little other than a massive shift of wealth that would naturally take place during the transition. This result would benefit only speculators and would be just another mirror of our historic flip-flops where various interests gain back and the core problems remain unsolved.

Unfortunately, all to often I see people gravitating to gold as it’s something they can get their hands around. You have clearly identified the other issues as well, so I don’t think you’re naively suggesting gold by itself, but others do. For me this is a distraction, it keeps people from seeing the bigger picture. It can also get in the way of a viable solution.

No one is going to revamp our entire financial system in one big step, and if they tried the immediate consequences would be so devastating that it would likely fail and be repealed before the benefits would come to fruition. What I’m particularly interested in is finding a series of reasonable steps that can lead to a much more correct and sustainable long-term solution. I’m looking forward to your next article in that regard.

The Rat Cap said...


Thanks for your comments as always.

Inflation of the money supply is the essential cause of the boom-bust cycle. If we adopted a 100% reserve gold standard (FRB would be effectively prohibited since the courts would insist on separate deposit and loan contracts) - the only way the money supply would increase would be through increases in the gold supply which are physically very limited since it takes work to get it. Even during the 19th century "gold rush", prices did not rise that much.

If the government wished to spend, it would be in a position where it would have to tax or borrow. It could not create money to fund its deficits. (Today, the Fed purchases government debt with money it creates, but effectively it is the same as the government printing money). Therefore, the government could not arbitrarily increase the money supply as it does now under fiat money and cause boom-busts.

Gold and fiat currency are not just two potential arbitrary options. Gold (or any hard commodity) has actual value as does silver or platinum, etc. The market chooses it as a money because of its properties. Fiat money is money because the government forces us to use it through legal tender laws. There is no moral, political, or economic justification for fiat money.

My argument in the post was that gold was not the culprit in the 19th century - bad law was the culprit. The state refused to uphold banks obligation to redeem in specie and allowed the practice of FRB to continue which put inflationary pressure into the system. The solution was simply for the state to uphold contract law and to recognize the legal difference between a deposit and a loan.

The fact that despite all of this bad law, prices remained relatively stable throughout the 19th century and that we had the greatest economic expansion in history is testament to gold.

Specie is not just an arbitrary construct. It is the choice of the market - and if the state performed its legitimate function, the boom-bust cycle would be virtually eliminated.

Incidentally, Dr. George Reisman proposed a plan to transition to a gold standard from our current system. In essence, he would have the Fed pay its current gold stock to the banks at a revalued price (price = total money supply/gold stock) so as to not reduce the current money supply. Plenty of problems with that, but a good start. His solution was posted in his blog www.georgereisman.com

I can find the exact link if you wish.


Galileo Blogs said...

Hi Doug,

I am enjoying your series. I am trying to understand your argument against fractional reserve banking in its simplest form. Essentially, your legal/political argument, as I see it, is two-fold: (1) The courts failed to properly identify the nature of banking deposits by declaring that a transfer of property title occurred. This permitted the banks to commingle the funds and lend against them, using them as less than 100% reserves for loans. (2) Simultaneously, governments intervened to excuse banks from their legal obligation to convert currency into specie upon demand.

The economic argument is also two-fold: (1) As a result of the above, banks could engage in fractional reserve banking. (2) This allowed banks to lend in excess at times, fostering or aggravating the boom-bust cycle.

Therefore, you conclude, fractional reserve banking should be declared as illegal.

I don’t see how the conclusion follows from your premises. Given the legal/political violation of property rights, as you described it, the solution is for the government to stop violating those rights. The solution is not to ban fractional reserve banking, but to *permit* 100% reserve banking. Specifically, that would mean that the government should legally recognize the type of deposits that you describe, where the customer retains title in a form where the banks cannot fractionally lend against them. It also means that governments should uphold contracts that require convertibility of currency into specie.

But I just don’t see how this argument means that government should *ban* fractional reserve banking or any other commercial practice, as long as fraud or force is not involved. If all parties agree to these terms, by what right does government ban it?

Moreover, the existence of economic harm to third parties is not sufficient justification to ban the practice, either. All economic actors face such consequences. To use that hoary example, horse-and-buggy manufacturers faced that consequence, but so does a shopkeeper, for example, in a company town where the company goes bankrupt, or even someone living in a region whose main industry is becoming obsolete. Economic consequences of this nature do not involve force or fraud and are endemic to capitalism. The economic consequences of fractional reserve banking belong in the same category.

I may have mis-characterized your argument, particularly your legal/political argument. I welcome your comments.

The Rat Cap said...


Thanks much for your comment.

You said:
"Specifically, that would mean that the government should legally recognize the type of deposits that you describe, where the customer retains title in a form where the banks cannot fractionally lend against them. It also means that governments should uphold contracts that require convertibility of currency into specie."

That is essentially what I am arguing. I don't think the government would "ban" it in the sense of passing a law. It would simply refuse to uphold a contract in which a bank obligates itself to safekeep property (owner retains title) and simultaneously loan it (owner transfers title).

I think the English courts could have stopped FRB simply by ruling, in those cases I cited, that the deposits were "bailments" which is how they ruled in grain warehouse cases. Depositors would then have had a claim against any bank that misappropriated their deposit. If a customer wishes to loan, then he must enter into a loan contract where he transfers title. Banks should have separate deposit and loan departments as some did historically.

Economic outcomes follow from the legal framework. Proper law leads generally to good outcomes (state upholds property rights leading to production and innovation) and bad law leads to bad outcomes (in this case, FRB led to inflation and panics). However, the economics is secondary - I'm arguing that the boom-bust and subsequent pressure placed on inflationary banks was a consequence of bad case law. I would not say "this had a bad economic outcome, therefore it should be illegal..."
Bad economic outcomes are usually just a sign of bad law.

Unfortunately, this series of events did not lead to good case law (distinguishing deposit from loan banking), but to the state defaulting on its obligation to uphold contracts in order to bail out the banks which led to even more disasters down the road culminating in all out fiat currency and central banking in the 20th century.

So while I don't think FRB is a major issue in and of itself, it did provide an argument that "free banking leads to crises which the government must step in to solve"

In fact, this is a case where bad law leads to bad outcomes and the concept of "capitalism" takes the blame. This is similar to the current crisis where massive governemnt intervention leads to a housing crisis and the "free market" is blamed for causing disasters.

Again, if deposit contracts and loan contracts were legally separated it would lead to 100% reserve standards. A receipt for a gold deposit would mean that the gold is actually there at the bank and the holder has legal title to it. A "note" would offer a future payment of some property per the details of the note contract. This would effectively lead to a 100% reserve standard.

Then, if the state would simply uphold the redeemability of the receipts in all cases, banks would know that they could not get away with misappropriation under penalty of fraud or liability suits.

Let me know if my response gets at your question.

Raman Gupta said...

Thanks for the clarification on deposit vs loan -- that was very helpful. However, I'm not sure I see the connection between this and fractional reserve banking.

My understanding is that you've described a situation in which deposits are today treated as loans (Cottenham writes "Money, when paid into a bank, ceases altogether to be the money of the customer; it is then the money of the banker").

However, this does not seem to imply the possibility of fractional reserve. The money loaned, becoming the property of the bank, can likewise not be loaned to others without transferring title. But of course one should not be able to transfer title to property one does not own i.e. the bank should be able to loan the amount it has been loaned, but no more.

Granted, in a deposit situation the bank would not be able to loan any of the property. But even treating the deposit as a loan doesn't seem to imply they should be able loan multipliers of it.

So isn't the basic problem here a proper philosophical understanding of property rather than the confused semantics of calling a loan a deposit?

Kevin said...

I'm not an Objectivist, so my take may be different, but the key distinction is that under the FRB system the bank SIMULTANEOUSLY uses the money to make a loan AND promises that you can have full access to it. When you have full access to a fund (complete liquidity) then that fund is de facto currency. Of course the bank cannot actually do this. The loan cannot be arbitrarily called in so the bank is not capable of repaying all loans. In this way, the bank acts to effectively expand the money supply. The government then shelters the bank from it's false promise by providing guarantees.

I agree with Doug that it should not logically have permitted the transaction in the first place. It should permit the funds to be deposited and held OR deposited for the purpose of being loaned out. In the first case they would be 100% available to the holder, in the second they would have to reflect in some manner the conditions of the loans made. Perhaps this is a different view than Doug's, but a system that did these things would have prevented a huge portion of the boom/bust cycle by eliminating the vast increases in the velocity of money generated by the effective multiplication of money by treating loan deposits as fully liquid assets.

The Rat Cap said...


Yes, that's essentially what I am saying. Either it is a deposit or a loan. Not both.

(I don't think Objectivism has a position on this issue directly - its really a derivative issue in property law and economics, not philosophy as such; It seems to me that philosophy could only go so far as to say why property rights are necessary preconditions of proper survival, i.e., to define why they are necessary from an ethical and politial point of view).

HaynesBE said...

RE: gold vs. fiat

Another important feature of commodity money is that it can be privately owned. Fiat money is "publicly owned." By its very nature it must be a creature of government.

Private property laws, including enforcement of contracts for redemption of paper money, are important limits on the inflationary expansion of credit and money supply (as Doug has demonstrated in his posts.)

Private property laws are not applicable to fiat money, and thus it is vulnerable to all the problems associated with "public property" as evidenced by the tragedy of the commons.

When any good is privately owned, the incentives are to preserve its value through prudent stewardship, and investment. Efficient use is rewarded. Misuse and abuse are punished.

What we know from the tragedy of the commons is that without private ownership, the incentives are reversed.

With publicly owned fiat money, the incentives strongly favor manipulation its value to one's own advantage. Because the money is politically derived, it will always be vulnerable to political manipulation. Those who can succeed at manipulating it in their favor will have much to gain.

In money, as in all goods, the establishment and protection of private property is the key to peaceful and just social interaction.

The Rat Cap said...
This comment has been removed by the author.
The Rat Cap said...


Thanks for your comment.

You say:
"Granted, in a deposit situation the bank would not be able to loan any of the property. But even treating the deposit as a loan doesn't seem to imply they should be able loan multipliers of it.

So isn't the basic problem here a proper philosophical understanding of property rather than the confused semantics of calling a loan a deposit?"

Interesting questions.

On your last point, I think the confused semantics follows from the improper philosophical understanding of property.

First, I think we agree, that if a bank simply and properly treated a deposit as a deposit (owner retains title and bank merely stores like storing furniture at a storage garage) then the bank can not loan it out at all. It would keep 100% of the "tantundem" for immediate withdrawal upon request.

I think what you are saying is "even if the bank treats the deposit as a loan, it does not have to loan multiples, it could just loan up to 100% of the amount of the deposit".

Let's take an example.

Let's say a bank has $100 of checking demand deposits. Under a proper system, the bank would simply keep the $100 in a vault and when people want it - they redeem it.

Under frational reserve, let's say the bank loans $90 of the $100 and keeps $10 in the vault (hoping that all the depositors don't show up at the same time demanding their money.) You see, the act of loaning out the funds immediately causes the bank to be in the position of having only a fraction of the original deposit.

So, once a deposit is considered by the bank to be the bank's property, and the bank chooses to lend the funds, it immediately leads to a fractional reserve situation.

Let me know if that answers your question.

The Rat Cap said...


Thanks for that comment. I had not considered the public vs. private property angle. If you wish to further elaborate on the concept of the "tragedy of the commons" and how it applies here - please feel free.



The Rat Cap said...


I realize that my answer did not go far enough to explain.

Going through my example again:

Let's say a bank has $100 of checking demand deposits. Under a proper system, the bank would simply keep the $100 in a vault and when people want it - they redeem it.

Under frational reserve, let's say the bank loans $90 of the $100 and keeps $10 in the vault (hoping that all the depositors don't show up at the same time demanding their money.) You see, the act of loaning out the funds immediately causes the bank to be in the position of having only a fraction of the original deposit.

After the bank lends out the $90, the people who obtained the loan then deposit the $90 at their bank. That bank now has $90. It keeps $9 in its vault and loans out $81. That $81 gets spent and deposited somewhere else. And so on.

In all, the original $100 will expand to about $1000 if they all keep 10% back.

HaynesBE said...

I wish I had more time to expand! I am desperately trying to stay focused on healthcare--but this discussion of banking, fractional reserve and the nature of money is just too tempting!!

In brief, I think "the tragedy of public money" is in part another way to look at the importance properly defining property rights in bank deposits.

When property rights are not clear, then the incentive for banks is to expand credit. When banks are not held to redeeming money in specie, they are able to "externalize" the negative effects of credit expansion onto the general public via price inflation and loss of purchasing power--without being held accountable for the consequences their own indiscretions.

Typical of all government vs. private distortions and harms, when the government gets to avoid paying in specie, the problem is magnified.

(For example, the harm the Mafia or a private army can perpetrate is nothing compared to the harm the state is able to inflict if not properly restrained.)

With fiat paper money, those who are able to obtain the increased supply first are able to buy at pre-inflation prices. Once the increased supply has spread evenly throughout the economy, the general purchasing power is eroded--but those who were able to obtain and spend the new dollars first, do so with greater purchasing power. Thus the incentive is to inflate and be sure you are the one who gets the new money first.

The other incentive for inflation is to erode away debt. The biggest debtor is government--so those who control the supply of money also have the greatest incentive to erode its value.

These are just a couple more arguments why commodity money (gold or whatever else the market chooses) is far superior to fiat.

Gold is private.
Fiat is public, e.g. political.

Sorry, Not as cogent as I would like it to be, but it's all I have time for. Maybe someone else can tidy it up.

Raman Gupta said...

Thanks for clearing that up -- the key is the word *demand* in demand deposit. That is to say, it is not simply a semantic confusion as to whether the money is a loan or deposit -- the money *is* actually a deposit because the depositor can demand it at any time. However, it is also a loan because the bank has title to it and can therefore turn around and loan it to others. And hence the house of cards -- as you said the money should be one or the other.

Great article.

The Rat Cap said...


YES. I probably did not focus enough on the "demand" concept although I implied it. A demand deposit is just that, it's available at any time, and that could only be possible if it is your property. If you agree to lend your money, you have no right to demand anything except repayment at a certain time per the terms of the loan.

Kevin said...


I found your discussion of commodity money versus fiat money interesting. Of course ALL commodities have winners and losers that are inflation and information sensitive including fiat money. If you have advanced information that a crop will fail or that a gold mine has struck a huge vein, etc then you can trade to your advantage on that knowledge.

The problem with fiat money is that it is uncontrolled in its production. If the government expanded the supply in a fixed and fully predictable way all those arguments would not hold up.

Likewise, the government can interfere in a commodity money environment in a host of ways and in the past has always chosen to do so.

The real issue to me is finding ways to keep the government from manipulating those supplies. This is why I advocate moving to stronger forced constitutional limits rather than soft solutions like changing the legal tender basis, or even moving to private tenders (bank or privately managed, etc).

HaynesBE said...

RE:Likewise, the government can interfere in a commodity money environment in a host of ways and in the past has always chosen to do so.

Thank you for your thoughts.

I am wondering if there are ways that the government has interfered with a commodity money that still upholds property rights and the enforcement of contracts?

I am curious if the examples you have in mind a problem not of commodity money but with improperly defining and upholding property rights. Maybe not, but examples would help.


Kevin said...


Unfortunately, so far as I know there has never been a system of commodity money in which the government upheld property rights and enforced contracts in fully (so far as I know), so I cannot give an example of that.

Some examples of manipulation during commodity backed money systems include the addition of silver (also a commodity) and the artificial pegging of silver/gold (Sherman Silver Act I believe). The choice by the federal government to allow certain banks to offer un-backed deposits during the first and second bank of the U.S period. The manipulation of accounting rules and changes to withholding practices that took place throughout the first half of the 20th century (allowing strange leveraging systems).

Of course, all of this ignores the huge importance of the government's ability to borrow and pay off debt as a mechanism to influence the money supply.

I agree that n the absence of other levers, commodity money works just fine, but when other levers are present it is just a mild brake on the governments practices.

The Rat Cap said...


I did address the bimetallism issue in the post (pegging silver to gold ratio.)

In practice, sure, the government can always do something crazy and screw everything up. The important issue here is to establish the correct principles. In principle, market participants should be free to use any money they choose. The fact is that the market always chooses gold and silver because of its properties.

Also, the government exists to protect individual rights, particularly, property rights. In this context, it means that the government should uphold contract law, define property properly, and so on. If the government defaults or fails in its obligation, there will be problems whether there is fiat currency or gold.

In practice, we should be aiming to get as close as possible to a system in which the government exists only to protect rights and market participants are free to trade voluntarily. The closer we get to such a system, the better off we will be.

In practice, I disagree that gold acts as only a mild brake since the government has many ways to screw up the monetary system. I think it is a massive brake! This can be seen logically and empirically.

As I said in the post, despite all the ways in which the government screwed up during the gold standard, prices still remained relatively stable as compared to the exponential loss of purchasing power we have experienced during fiat currency.

Ultimately, gold prevents a government from infinitely printing money to fund its deficits. Yes, ideally, it would function "perfectly" in the sense that it would be on a 100% reserve and would float freely relative to other metals, etc. and yes, the government can find dumb ways to mess it up, but any step in this direction would be beneficial compared to the absurdly destructive system we have now.

Fiat money makes it incredibly easy for the government to inflate endlessly.

Kevin said...

Thanks Doug and Beth for the comments. I think this direction of conversation has been played out. Especially since I think we are in substantial agreement on most points. While neither of you feel it's safe or fair to use a Fiat currency and I remain unconvinced, I am not averse to your answers on that topic.

One other area I had some questions about was government debt financing. I am much more opposed to government debt than I am to any particular answer with regard to currency systems. To me, government debt is a dangerous practice and I agree with Lincoln in his wish that the constitution had forbidden it.

My objections are both practical and theoretical. On the practical side, it is always easier politically to spend money you don't have NOW and let others worry about it later. As such, it hides the real costs that people are paying for their government services from them. On the theoretical front, it is equivalent to a parent creating a debt obligation for a child. Highly immoral and not something that should be upheld from a property rights standpoint.

From a purely practical standpoint, we can see how the states which do not permit debt financing are in much better shape than those that permitted it (compare the fiscal condition of Colorado to California or New York).

While both of you are opposed to FRB (as am I), a was wondering your take on debt.

HaynesBE said...

RE: gold and a brake on government's ability to print money and go into debt

Gold does act as a brake when the government is required to redeem its notes in specie upon presentation --as a principle of property (and derivatively of contracts.) As you are most likely aware, avoiding the consequences of money inflation (debt creation or printing bills, it doesn't matter) is the whole reason governments suspend redemption of their fiat paper.

When the value (purchasing power) of a fiat paper money starts going down, everyone wants to convert it before the value drops even more. Bank runs, including runs on the US Treasury, are the means of punishing those who attempt to inflate.

The point of my question previously was to look at examples of past abuse by government when on a gold standard, and then see if those abuses could be averted through strict application of property and contract. My suspicion is that in all cases, they could be.

Doing the thought experiment about the efficacy of a fixed fiat vs. commodity money is an important part of understanding the intricacies of the problem.

In the end, though, I think the essential here is avoiding arbitrary and artificial inflation of the money supply (because it amounts to theft.) No money will be devoid of fluctuations in amount, but a system of commodity (market-chosen, i.e. voluntary) money in conjunction with enforcement of property rights is a system which is just, and at the same time, the least susceptible to manipulation and includes built-in correction mechanisms.

Thank you for the probing questions and comments. It truly helps to keep my thinking fresh and clear.

You may find the following exchange on my blog of interest:
An argument for a commodity money and An argument for fiat money

UPDATE: Just saw your latest comment. I will let the above stand even though I can see that it is time to agree to disagree about fiat money.
Except...I fully agree that the extent of debt we have now in unconscionable. Debt per se is a bit tougher, although I do think that the ability to take on debt by the government would be severely limited by a commodity money. Take on too much debt, and your notes start loosing value. People (or countries) then move to redeem them, gold flows out of the country, and no one wants to lend to the government any more. If the Treasury can't sell its bonds or pay its debts, the government has to resort to raising taxes or cutting spending. It's all so much more honest.

Galileo Blogs said...

Hi Doug,

I do not want to get caught up in a legalistic discussion of case law or a technical discussion of definitions of property as it applies to banking deposits. I am not a lawyer. However, such a discussion is derivative to the more fundamental issue of property rights and the freedom to contract.

If the government does not uphold a valid contract, it is a violation of the rights of the contracting parties. That would apply for a contract for a financial arrangement (regardless of what it is called) that leads to fractional reserve banking.

To not enforce such a contract, as you suggest, is tantamount to banning the practice.

Could someone create a financial arrangement that does not involve force or fraud and leads to fractional reserve banking? Yes. The contract would involve "deposits" (whatever you want to call them) and a contractual commitment by the bank to redeem those contracts on demand in specie (presumably that is what the depositors would want). However, it would be understood that the banks would only keep fractional reserves and honor those demands using those fractional reserves.

As long as the banks were clear on this last point, there would be no fraud. Its customers would knowingly accept the risk that a bank may fail to honor its commitment to redeem their deposits because it is not keeping 100% reserves.

Legally, government could not ban or fail to enforce such a valid contract.

The question then becomes an economic/commercial one of which form of banking would win in the marketplace, fractional reserve or 100% reserve banks.

Let the best bank(s) win.

The Rat Cap said...


You ask:
"Could someone create a financial arrangement that does not involve force or fraud and leads to fractional reserve banking?"

While you answer "yes", I answer "no". Let me explain my reasoning.

A contract which is contradictory is null and void, and in this case fraudulent. If two parties contracted for one to paint a house red and blue, it would not matter that they freely entered into the contract. It is null and void since it makes no sense.

In the same way, FRB makes a demand deposit available at all times yet it is not available at all times by definition.

Let me quote de Soto:

"any bank loan granted against demand-deposit funds results in the dual availabilty of the same quantity of money: the same money is accessible to the original depositor and to the borrower who receives the loan. Obviously the same thing cannot be available to two people simultaneiuosly and to grant the availabity of something to a second person while it remains availabe to the first is to act fraudulently."

continuing another quote:

"In most cases, this contract is null and void, due to a discrepancy concering its cause: depositors view the transaction as a deposit, while bankers view it as a loan. According to general legal principles, whenever the parties involved in an exchange hold conflicting beliefs as to the nature of the contract entered into, the contract is null and void."


"Moreover even if depositors and bankers agreed that their transaction amounts to a loan, the legal nature of the monetary bank-deposit contract would be no more appropriate. From an economic perspective, we have seen that it is theoretically impossible for banks to return, under all circumstances, the deposits entrusted to them byeond the amount of reserves they hold...According to general legal principles, contracts which are impossible to put into practice are also null and void. Only a 100percent reserve requirement, which would guarantee the return of all deposits at any moment, ...could make such "loan" contracts(with an agreement for the return of the face value at any time) possible and therefore valid."

I think the type of transaction you contemplate would have to be a loan contract (a note) wherein the parties agree that title has transferred but with a call provision that obligates loanee to make effort to immediately make funds available. This would be like how a money market fund works today. The bank would necessarily have to keep the funds invested in very liquid instruments but there is still a clearing process where the bank must sell securities to make good on your call (i.e., this is different than a demand deposit.)

If you offered someone a check or note on this basis, they would have to understand that it is not a demand deposit receipt but a note and would carry some risk with it during the clearing process (whereas a demand deposit receipt effectively has no risk as it is 100% backed.) And, importantly, because of that risk, you could not "guarantee" return at face value.

Could the bank "pyramdid" loans that it receives?

No. Once you loan money to the bank, the bank can not turn around and pyramid. For example, let's say you loan the bank $100. The bank, presumably, will take this $100 and invest it in something that will make enough money to pay you back + interest + profit. Under FRB, the bank could loan out a multiple of $100. But, under proper contracts (as I have defined them - deposit vs. loan), what could the bank give to a third party other than $100 in demand receipts, (i.e., the same issues apply as above)? If they tried to loan out $500, they would be committing fraud since they would only have $100 in specie.

Let me know if that helps answer.

Galileo Blogs said...

The principle of fractional reserve banking is similar, and no less valid, than going to a restaurant or renting a car. Neither the restaurant nor the car rental agency maintains enough spots for everyone who has reserved one. It knows that some of those reservations will not be fulfilled; some of the renters and diners will not show up.

As a car renter or a diner, I know this. I know that there is a chance that the car or dining table will not be there for me when I show up to claim my reservation.

Even so, and even though occasionally I am told the restaurant is full (or there will be a wait) or they have run out of cars, I accept this system.

I accept the risk because it is preferable than paying extra so that the restaurant or car rental agency could maintain extra inventory. I am willing to bear the risk of disappointment so that my cost is less.

In each case, the car rental agency and the restaurant is economizing on its reserves.

Of course, banking is different because of how fractional reserves "pyramid" into a larger quantity of loans. But that just means that banking is different in that sense.

As long as customers know what they are dealing with, there is no fraud. If the word "deposits" implies something that it is not, don't call it that. Call it by any name; as long as customers know that the banks are using the principles of fractional reserves, there is no fraud, and government must legally uphold these contracts.

Think about what it means for government not to uphold the contract. It means that government has intervened in the voluntary arrangements of people. That is a violation of their property rights. It is an intervention.

Just because fractional reserve banking, according to this argument, has disadvantageous consequences, it is not a valid argument for restricting it. Recall that during the period of gold-based fractional reserve banking in the 1800s, the United States economy grew at a historically unprecedented rate. That fact does not endorse fractional reserve banking, but it does provide context. We are not talking about a financially calamitous system that would cause us to look at this issue from a more fundamental basis than property rights and contract law.

I will post two separate posts that elaborate on some of the economic aspects of this argument.

Galileo Blogs said...

Actually, just one comment to follow up on "Let the best bank(s) win”:

I see no reason why the money of both fractional and 100% reserve banks could not, in principle, circulate side-by-side. The issuers of the currency would, of course, properly identify the product they were offering. On one would say something like, “100% specie reserve notes.” On the other, something like, “Fractional specie reserve notes.” If they circulated side-by-side, the interesting thing would be whether the fractional reserve notes would sell at a discount. In the long run, would one or the other “win” in the marketplace, or would both continue to circulate side-by-side?

To the holder, a value of the 100% reserve notes is their relative security. If there were a run on the banks, these notes should maintain their actual value in specie, whereas the fractional notes may not. The question is: Would the market care? Would it value the extra security provided by the 100% reserve notes to the degree that it would pay more for them than the fractional notes?

From the banks’ perspective, would the reputational value and enhanced marketability of the 100% reserve notes make them preferable for issuance than fractional notes? The 100% reserve notes would be more expensive to provide since the maintenance of those reserves would be more costly. The fractional reserve bank could gain more income from lending based on its fractional reserves than could the 100% reserve bank, with all of that gold tied up in its vault.

This dynamic should play itself out in the market, free of government preferences for one form of banking over the other.

The Rat Cap said...


The car rental or restaurant is a bad analogy. You do not own the cars (have title) or own the food. In this instance, you are contracting for a future service; if they were contractually obligated to provide you something, then you do have recourse in this case. But, you do not have title to the car or food in which case you could demand that they give you your stuff back.

Again, even if the depositor and bank freely agree to this arrangement, the contract can not be enforced because it entails a contradictory arrangement. It asks that the depositor retain full availability (of HIS property) at all times at face value while allowing the other party to use the property as if it were his.

Someone has to have clear title to the property at all times.

If the depositor loans the funds to the bank, the situation is different. Title is legally transferred and it becomes a loan contract. The bank can do whatever it wishes with the money (per the loan contract); it only has to pay the lender back at the time agreed;

Say a person comes into a store and wants to buy a table. He offers the store a demand deposit receipt for gold. In other words, the store knows that the customer has title to the gold and that it is 100% available. The demand receipt is money.

Now, let's say the customer offers the table store a note and says, in effect, "I'm offering you the future payment of gold at such and such time to be made by XYZ bank." Certainly, the store could accept such a payment but the note would not be the same as the demand deposit receipt.

If the customer offered the table store a ticket that said "100% fully redeemable on demand" but in reality, the customer did not have title to the gold (because the bank lent it out), he would be committing fraud by presenting payment that was not actually what it purported to be.

Galileo Blogs said...


Law exists to codify the voluntary arrangements that people choose, not the other way around.

If people wish to establish the economic arrangement of fractional banking, the law needs to be adapted to recognize those arrangements.

The law has done this many times in the past. It has adapted to recognize all sorts of new financial arrangements, such as bills of exchange, financial derivatives, etc.

In this case, customers place money with the bank and the bank uses a portion of that money as a reserve to pay them when they want it back. What has happened to the legal title of those reserves? That is a legal question, but not an economic one.

The point is that the law must recognize the (perfectly valid) intentions of the contracting parties.

The Rat Cap said...

What if the parties voluntarily agree (sign a contract) to the effect that one party shall mow the other parties lawn but at the same time should not cut his grass?

What if two parties freely contract that they will create phony receipts and pass them off as valid but making best effort to make good on them? What about the third parties who receive these receipts?

What if two parties freely contract that one party will kill the other's wife?

You can not separate the legal question from the economic question. This is a "multi-disciplinary" problem.

The Rat Cap said...

I.E., the intentions here are not "valid" in the sense that they ask the court to uphold a contradiction.

Property means the right of one party to use and dispose of some physical item. You can't ask a court to uphold your right to your property while simultaneously allowing someone else the full use and disposal of the property. If you wish to do so, loan the property.

Simply recognizing the deposit/loan distinction would solve the problem for the market.

Galileo Blogs said...
This comment has been removed by the author.
Galileo Blogs said...


The fact that a commercial practice as widespread as fractional reserve banking does not have a proper legal description (according to your argument) is not an argument that it is invalid. Instead, it is tangible evidence that the law needs to be advanced to recognize this practice.

I think that the examples you provide are reflective of an improper legal understanding of fractional reserve banking. I cannot provide such an understanding, but I can describe its economic significance and its validity under the principle of voluntary trade.

I am confident that the legal "murkiness" of the practice can be readily resolved because of my confidence that fractional reserve banking is consistent with the moral principle of property rights and voluntary trade. However, I am unable to discuss the specifically legal principles that apply. I have insufficient knowledge of law to do that.

The Rat Cap said...


This is fairly complicated legal issue - that is part of my point - the legal nature of the contracts have to be properly defined in order for the market to perform optimally (I hate those words...)

There is some more technical discussion of these issues at the mises site, eg.


of course, I highly recommend the references I cited, particularly Jesus Huerta de Soto's book.

Although the practice is widespread as you say, it should be noted that the practice has a long and somewhat sordid history dating back to antiquity. The practice really started as a form of misappropriation by goldsmiths who "created" more receipts than gold while safekeeping. As bankers and governments figured out that they could utilize the practice to their advantage, it became somewhat institutionalized, particularly as central banks began forming (see 1690's Bank of England) and forward and governments realized this was an easy source of funding.

Galileo Blogs said...

What is sordid depends on one's perspective. Some of the goldsmiths probably simply made the observation that they did not actually need to keep all of the customer's gold on-hand to meet redemption requests.

Economically, it was not necessary. They could *economize* their supply of gold by lending a portion of it out.

All one had to do to take the "sordidness" out of this practice was to make it honest. If the goldsmith stamped on his receipts something that made clear his intention to lend out the metal, there would have been no fraud.

So often, economic practice advances faster than the law, which has to catch up. This was probably such a practice. Clearly, there were economic reasons for fractional reserve banking to emerge.

This discussion reminds me of the battle against usury. According to the moral and legal principles of the Middle Ages, usury was theft. But, despite hundreds of years of prohibitions and legal/philosophical interpretation, the practice would not die out. It did not die out because it made economic sense. Eventually, philosophy and the law (partially) acknowledged the moral validity of the practice.

("Usury" in the medieval conception, simply meant "interest." To receive any interest at all for a loan was usury, and immoral.)

The Rat Cap said...
This comment has been removed by the author.
Raman Gupta said...

One other perspective on this is that by legally allowing deposits to be loaned out fractionally, the value of the money of all *other* holders of that money is reduced. Only if a corresponding or greater amount of wealth is produced as money created would that not be true, but there is no guarantee of that occurring.

Now, users of an FRB bank's money should understand that the money may inflate and choose to hold/use it anyway. My gut instinct is to agree with GB in that I see no inherent reason for this to be legally restricted.

In practical terms, clearly the market would institute currency rating agencies and exchange mechanisms between all currencies, whether FRB or 100% reserve, which would automatically act as a brake on the inflation of FRB currencies.

The Rat Cap said...


I completely disagree. If I store my valuables at a storage garage, you are right, it certainly does make economic sense for the owner of the garage to steal my stuff and lend it out for an extra profit! But, it is illegal without my permission (if it was a deposit contract.)

If you go back through some of my references, you will see that these historical cases were cases of theft and misappropriation. In some cases, I agree, maybe the depositor and the goldsmith agreed, but they then imposed a fraud on third parties who accepted their unbacked claim receipts.

Usury is a completely legitimate concept, objectively, in that an owner of property has the moral and legal right to lend his property in exchange for payment. This follows from the nature of property rights.

FRB, I hold, stems from a confusion over property transfers, which then became memorialized in rather bizarre common law rulings. (e.g. grain warehouse law different than banking law).

I agree, there are economic forces that tend towards wanting the practice. This is extremely profitable for banks just as it is profitable for anyone who runs a Ponzi scheme. Also, in the short run, depositors do not have to pay a safekeeping charge and may even obtain interest on their demand deposits. So, all appears fine. However, there is a hidden cost in terms of the inflation and furtherance of boom-bust, malinvestment, etc. that is well documented theoretically and empirically in de Soto's book.

C.W. said...

I am not convinced that a mere legal distinction will be sufficient to do away with private fractional reserve banking. Neither von Mises or George Reisman wanted legal solutions to this issue either. Both thought that the market would do away with the practice, meaning that depositors, given the choice between banks that did or did not engage in fractional reserve banking, would choose banks that acted as depositories.

I am not so sure about this either. Banks have only two income sources: fees and interest. An institution that acted as a depository would have to charge fees, fees for holding the gold, fees for issuing deposit slips that were transferable, fees for checks, fees for just about anything it could. An institution that loaned out a portion of its deposits would earn its income from the interest on the loans. In fact, many banks paid interest on demand deposits in the past. When the bank made clear what its practices were, and demonstrated that it could manage its affairs, it attracted more deposits. People prefer to earn money rather than pay fees. As my mother used to say, "Yous pay your money and takes your choice." Given freedom, and keeping the government away from the economy, we can see what the depositor wishes to do.


DarkWaters said...

It sounds like the legal issues surrounding fractional reserve banking are currently non-objective. However, I agree with GB that this does not mean that fractional reserve banking is inherently contradictory and impossible to implement with objective law. Until it is established that fractional reserve banking as a concept is inherently contradictory, there is no basis to make it illegal.

First, the deposit-loan distinction sounds like a false alternative if it is to be interpreted as a dichotomy regarding bank transactions.

Why could there not exist contracts that say the bank will allow a customer with an account balance of X dollars may withdraw up to Y dollars on demand if the banks current reserves are within the range (U,V)? In other words, a Y is specified for each triple (X,U,V) where (U,V) is a range. Needless to say, the legal details probably need to be more sophisticated, but under such an agreement a customer's account neither constitutes a 'loan' nor a 'deposit'.

I also think the issue of fractional reserve banking is further complicated because the government currently has an unjust monopoly on currency. In a free market, each bank would have its own bank certificates. Banks that repeatedly fail to honor the withdrawal requests of their customers will develop a bad reputation and will have devalued certificates. Banks that establish a trustworthy reputation will have highly valued certificates. In such a system, a bank that maintains a dangerously high ratio of certificates to reserves will be easier customers to identify and therefore do less damage than under a system with a government monopoly on currency.

C.W. said...

Now, having gotten my own comment in, I think that the focus on private fractional reserve banking takes away from the more important points in Doug's post, namely government manipulation of the money supply and fiat currency. I have noticed elsewhere that people get very excited about fractional reserve banking and I'm not sure why. Whatever the reason, it is ultimately minor compared with the harm that the government does, especially the current version: the Fed.

I am looking forward to Part 4.


Kevin said...

One thing to remember with regard to FRB is that in a world without fiat-printing-based inflation (or massive increases in specie) it’s not possible, even in theory, for banks to return all money to all depositors. There must be bank failures institutionally, and those depositors must lose their money. I don’t mean this “practically” I mean it absolutely and mathematically. I will assume people are familiar with this since I have a lot of other things to say, but if you don’t know and can’t see why this is the case I will be happy to follow up.

So in your theoretical world in which FRB is just people contracting together, there are a number of problems. 1) Everyone who accepts a check knows and understands that there is a risk that they will not get the money and the consequences of that risk are understood (and defined). 2) Everyone must understand that at some point all their funds may simply disappear.

Basically, using all such money is just rolling the dice about winners and losers. If you get out soon enough or can manipulate the banking system you can come out ahead otherwise you will either break even or potentially lose everything. It turns participation in a bank into a massive roll of the dice. Yes, you might get your interest return on your deposit (loan), but you may not.

Now, for it to be a widespread and legal practice, everyone would need to understand this. Everyone who takes a bank note, deposits money, gets a loan (in banks notes), etc. Otherwise there is no “meeting of the minds” and hence no contract. If you use these notes without the person receiving them understanding this you are acting fraudulently.

It’s equivalent to saying that a ponsi scheme is legal as long as everyone understands it will all come crashing down at some arbitrary point in the future. Sure, maybe people would sign up, but more than likely anyone signing up really doesn’t get it (and hence fraud is taking place).

Maybe this strange world could exist, but frankly that is a thought experiment that takes me nowhere. It sounds more like an excuse by people who get (and can manipulate) the system to justify it so they can defraud the people who do not. Simply saying the other party is stupid or uneducated does not relieve you of your legal requirement to achieve a meeting of the minds for any contract to be valid.

Today FRB exists and the only way that we can prevent collapses is by printing in to the system to counteract the FRB generated supply expansion. We print mostly through government loaning itself printed money. So in theory it’s just another GIANT loan, but it’s one that we can’t repay (without destroying every bank). Were we ever to attempt to repay this debt we would either deflate the system and crash virtually every bank and banking system, or be forced to pay it back through direct printing (not even an option under specie which is why we don’t have it).

HaynesBE said...

RE: "There must be bank failures institutionally, and those depositors must lose their money. I don’t mean this “practically” I mean it absolutely and mathematically. I will assume people are familiar with this since I have a lot of other things to say, but if you don’t know and can’t see why this is the case I will be happy to follow up."

I, for one, am completely unfamiliar with this argument and would be interested in reading your explanation.

C.W. said...


I'm with Beth, I am not familiar with your point either.

The balance of your comment suggests an iron clad inevitably of collapse. You seem to be saying that regardless of what people do, their free market activity will automatically lead them to doom unless forced to not have fractional banking. You aren't referring to one poorly run bank, but to the entire system which will come crashing down. I think that you are tending towards a very mechanical view of the economy in this instance.


Kevin said...

Sure, I'll follow up with a detailed explanation of why bank failures in a closed money FRB system are natural and inevitable. That will take some writing, so don't expect it right away (I'll try to get it done today).

BTW, I was not saying that ALL banks would collapse, just that some must from time to time. I hope I didn't give the impression that they all would.

Regardless of whether you accept this as inevitable or required you surely at least accept that they are possible (perhaps probable). That still implies the same legal obligation to disclose and that people understand that disclosure.

Galileo Blogs said...


I have enjoyed this discussion and trust that you have. It has sharpened my thinking on this issue. The books you cite also look very interesting, and I intend to pick them up in due course.

I look forward to Part IV of your series.


The Rat Cap said...


You said:
"I have noticed elsewhere that people get very excited about fractional reserve banking and I'm not sure why. Whatever the reason, it is ultimately minor compared with the harm that the government does, especially the current version: the Fed."



You said:
"Until it is established that fractional reserve banking as a concept is inherently contradictory, there is no basis to make it illegal."

I think that has been shown. Again, quoting de Soto:

"any bank loan granted against demand-deposit funds results in the dual availabilty of the same quantity of money: the same money is accessible to the original depositor and to the borrower who receives the loan. Obviously the same thing cannot be available to two people simultaneously and to grant the availabity of something to a second person while it remains availabe to the first is to act fraudulently."


Thanks for your thoughtful comments (and all else who have commented). It has greatly helped to clarify the issue and define the terms of the debate. This is a complicated topic that has legal and economic issues and very smart people have debated it for over hundred years.

As I said in the post:

"It should be noted that the primary culprit today is not fractional reserve banking per se. If bank notes are ultimately redeemable in specie, and the government upholds banks obligations to redeem, the practice would necessarily be limited (see the Suffolk Bank mentioned earlier)."

This is not to say that I believe that FRB is unimportant but it is a derivative issue of a much wider problem: central banking, fiat money, massive government budget deficits, and lack of any specie standard. If we get to the point where we are on a gold standard and the only debate is FRB, I would be very happy.

C.W. said...


I will agree, but I don't think that what I have in mind is what you want. All types of businesses fail all of the time. It is felt that a bank failure is a bigger thing, and perhaps it is, but poor management or bad ideas will lead to failure. On the other hand, good management will build a bank's rep. As a depositor, you want to choose a bank that will be well managed, etc. I am not going to be an armchair rationalist and declare what those principles will be in a free economy. I think that a rational banker will want to avoid failure and will find a method of opperation to succeed. Perhaps that will mean not practicing fractional reserve banking. I don't know before hand.


HaynesBE said...

RE: fractional reserve banking, demand deposits as bailment vs.loan.

I am trying to sort out what I think on whether or not FRB should be deemed illegal or not based on an understanding of non-contradictory property rights.

I think we are actually dealing with two separate problems:

1. Is is proper (honest and consistent with property rights) for a bank to lend out money placed into a demand deposit under any circumstance-- even if limited to dollar for dollar.

2. Is it proper to pyramid lending on a base of money even if it has explicitly been loaned to the bank.

I also think our grappling with the issues would be clearer if our experience of banking was already within a system of commodity money where contracts for redemption were consistently upheld. As it is, the implicit and explicit agreements with regards to checking accounts are quite muddled. Additionally, the desire to "make money with one's money" as a hedge against government money inflation also distorts our thinking about the role of checking and savings as banking services.

It seems that the first matter at hand is to insist on a return to honest money, i.e. a market-generated commodity money. Only a commodity money is consistent with all of the fundamental requirements of money (store of wealth, medium of exchange,and standard of value) and with Say's Law of Markets--production must precede consumption.

My guess based on historical experience is that it would end up being gold, but although gold can be money, money is not necessarily gold.

Once paper "money" is clearly a promissory note to be redeemed for real money, those notes are explicit contracts which must be upheld--and then, we can start thinking about how to construct those contracts consistent with property rights.

I am not yet convinced that is it necessary to insist on 100% reserve in order to be able to honor all money contracts. Given the flow of money, it seems reasonable that real world experience could demonstrate that it is possible to achieve a system which includes some degree of fractional reserve and yet still be able to consistently redeem bank notes on demand--because, the reality of the fact is that not everyone demands their money at the same time.

Still thinking.

The Rat Cap said...


I would ask anyone who can refute this argument to do so:

"no object can be owned by more than one party at a time"

(Cochran, et. al. http://mises.org/journals/qjae/pdf/qjae2_3_2.pdf)

FRB results in a state where various parties possess an ownership claim to the same thing

If I have a claim to my checking account funds, and another party has the same claim - who should be awarded the property in a court of law?

Burke said...

In a completely free society, why should the govt be dictating to citizens what they can choose to use as money and how their banks should operate (absent fraud)?

Eliminate the Federal Reserve and repeal the legal tender laws that force us to use govt issued money. Just let citizens agree on how they choose to deal with one another.

Tom said...

FRB is legalized counterfeiting. Please go read some Rothbard if you don't understand why FRB is amoral and should be illegal.

HaynesBE said...

Rothbard, Reisman (and Reich) all offer compelling arguments that fractional reserve banking is improper (I haven't read deSoto)--but that does not dismiss the need for systematically working through those arguments --a type of intellectual "chewing"-- in order to be sure one's thinking is solid.

GB and others have brought up some very interesting points that are worthy of consideration and which must be answered for a thorough grasp of the subject.


I like your challenge. Although I basically agree that there can only be one owner, and that FRB violates this, I am still trying to work through all the "devil's advocate" arguments...e.g. what are the limits to "renting" out one's money.

I remember spending lot of time doing the same with "A is A." Maybe I am slow, but it took me awhile to convince myself that it is undeniably true. Having spent that time however, I am much more confident in my conclusion.

I will take a look at Cochran. Thanks for the reference.

C.W. said...


George Reisman didn't like fractional reserve banking, but he also said that he was not in favor in any legal intervention. He felt the market would make it an unprofitable practice.


I am not in agreement that Doug's arguement is applicable or precisely on point. I think that the situation is more complex than what his solution can address.

Something that you might consider is that in a complex, advanced economy, the items deposited with a bank are not some specific property but a homogeneous currency, say gold coins. You are not actually claiming that you own specific coins, but the right to receive an equal amount of gold if and when you present the appropriate document, check, or note. You do not own a specific thing, but a right, which is transferable. It is not as if you placed the gold in a safe deposit box or rented a secure storage in which you placed bullion. In the fractional reserve banking practice, when you deposited the gold with the bank you understood that they kept only a limited amount on hand.


Burke said...

I understand why Rothbard claimed that FRB was fraud, but he was just wrong. It's fraud only if there is a misrepresentation. And, in this case, only if banks are representing that they are warehouses rather than engaging in FRB, misleading depositors about their practices.

In a free society, you don't have to deal with an FRB bank or agree to accept their money. Whether you do or not is an investment decision.

Govt involvement to prohibit FRB banking is a violation of the rights of those who wish to deal that way.

Burke said...

Doug writes,

"I would ask anyone who can refute this argument to do so:

"...no object can be owned by more than one party at a time"

Property (ownership) is the right of use and possession. That right includes the right to contract with others to use it in place of the owner, as with leases, and to share the incidents of ownship with others according to agreement, including becoming joint owners with rights established by agreement or law.

HaynesBE said...


I do recall reading early in Reisman’s book his argument that the market would most likely favor a 1005-reserve system over fractional banking without the need for government intervention. Later in Chapter 19 “Gold and Inflation” he makes the following case, which I interpret as him concluding that fractional-reserve banking is improper. He may have changed his thinking since writing the book, but I am not aware of anything he has written to contradict this.

“What underlies the practical advantages of the 100-percent-reserve gold standard over any form of fractional-reserve system is its moral superiority. It operates consistently with the law of the excluded middle and does not attempt to cheat reality by getting away with a contradiction. It recognizes that lending money precludes retaining that money in one’s possession, and that retaining money in one’s possession precludes lending it…In contrast, a fractional-reserve system applied to checking deposits or banknotes is a deliberate attempt to cheat reality. It is the attempt to have one’s money and lend it too. It is a system fully as dishonest as all other recurring efforts that take place in one form or another in attempts “to have one’s cake and eat it too.”

“It follows from this discussion that it is mistaken to believe that the imposition by law of 100-percent-reserve banking in connection with checking deposits and banknotes would constitute government interference. It would constitute nothing more than the just exercise of the government’s power to combat fraud.”

“It should be understood that everything I have said in connection with the subject of the fraud entailed in fractional reserve banking applies to a context in which the establishment of a 100-pervent-reserve gold standard would be a real possibility. It is pointless to accuse either banks or their customers of any kind of fraud in connection with fractional-reserve banking in a context such as of the present, in which the overwhelmingly greater fraud exists of the government’s creation of a monetary standard that is utterly nonobjective and arbitrary, namely, the fiat-paper standard.”

Capitalism: A Treatise on Economics, G. Resiman pg.957-8

The entire section, “The Moral Virtue of the 100-percent-Reserve Gold Standard” was good for me to review. (You can access the book on line if you don’t have a hard copy.)

An interesting discussion of this very quote took place several years ago at NoodleFood following a post by Diana Hsieh “Fraud or Not?” in which she strongly disagrees with Reisman.

Another interesting article is by Selgin and White, "In Defense of Fiduciary Media" who argue both for fiduciary media and fractional reserve banking--its the best case in favor that I have come across.

Although I heavily lean toward condemnation of fractional-reserve, my thinking is not currently clear enough to take an absolute stance one way or the other (though I do recall making some pretty strong claims in the past.)

The Rat Cap said...


You said:
"You do not own a specific thing, but a right, which is transferable. It is not as if you placed the gold in a safe deposit box or rented a secure storage in which you placed bullion"

The idea to which you are referring relates to the concept of "tantundem" and a distinction in the type of "transfer of ownership" that takes place.

When a good is fungible, like gold, grain, or jelly beans, meaning it is impossible to the tell the difference between individual units, the depository holds the "tantundem" in reserve, not the actual item, meaning he makes an equivalent amount of the same article available upon demand.

In the sense, that the depositor can not physicaly distinguish your pebbles of grain from another, it is true that a limited "transfer" takes place in that they are allowed move your pebbles around. However, this is fundamentally different than a loan contract in which full availability is transferred for a given term in exchange for interest.

Let me quote de Soto again:

"We have already seen that in the irregular deposit the transfer of "ownership" is a secondary requirement arising from the fact that the object of the deposit is a fungible good which cannot be handled indivdually...Indeed, as one may not, in strictly legal terms, demand the return of the specific items deposited, since this ia physical impossibility, it may appear neceeary to consider that "transfer" of wwnership occurs with regard to the indivudal , specific units deposited, as they are indistinguishable from one another. So the depoitary becomes the "owner," but only in the sense that, for as long as he continues to hold the tantundem, he is free to allocate the particular, indistinguishable units as he chooses. The is the full extent to which property rights are transferred in the irregular deposit, unlike the loan contract, where complete availabity of the loaned good is transferred for the duration of the contract's term. Thereofore, even given the one feasible "similarity" between the irregular depoist and the monetary loan (the supposed "transfer" of ownership), it is impoortant to understand that this transfer of ownerhsip has avery different economic and legal meaning in each contract. "Perhaps,..it would be wisest to hold that in the irregular deposit there is no transfer of ownership, but rather that the depositor at all times maintains ownership over the tantundem in an abstract sense. "

Again, an irregular deposit contract does not have a term and implies safekeeping and custody of the tantundem and continual availabilty in favor of the depositor. A loan involves the transfer of availability and is a fundamentally different legal contract.

end part 1

The Rat Cap said...

Part 2

As de Soto points out the distinction "lies in the essential difference between the cause or purpose of each."

"the loan contract always implies an exchange of present goods, the availability of which is lost to the lender, for future goods, which the borrower must return " with interest to pay for the loss of availability.

"on the other hand, in the monetary irregular deposit, the objective or cause of the contract is radically differnt. In this case there is no exchange of present goods for future goods, nor does the deposit have the faintest deire to lose the immediate availibity of the goood depost..."For this reason , there is no term, and the funds are deposited "on demand;"

Even if the customer enters into a deposit contraact "aware and fully accepting that banks will invest (or loan, etc.) a large portion of the money they deposit...this hypothetical authorization does not in any way detract from the essential cause or purpose of the contract for these customers, whose intention is still to entrust their money to the banker for safekeeping; that is, to carry out a monetary irreguarl -deposit contract. In this case the contract the depositors believe they have finalized is IMPOSSIBLE from a technical and legal standpoint. IF THEY ALLOW THE BANKER TO USE THE MONEY, THEN IT CAN NO LONGER BE AVAILABLE TO THEM, WHICH IS PRECISELY THE ESSENTIAL CAUSE OR PURPOSE OF THE CONTRACT."
end part 1

end part 1

De Soto makes some further points I find fascinating. He charactizes FRB contract as an aleatory contract (subject to chance) in that the "delivery of services by the bank is in any case an uncertain event which depends upon circumstnances particular to each case" deriving from the possibility that everybody shows up at the same time to withdraw and only the first to arrive would be able to do so. It is impossible to insure that the banker will be able to meet his obligation.

"in this case the supposed aurthorization would be irrelevant , due to its incompatiblity with the contract's purpose, and it would thus be AS LEGALLY NULL AND VOID AS ANY CONTRACT IN WHICH ONE OF HTE PARTIES AUTHORIZES THE OTHER TO DECEIVE H IM OR ACCEPTS IN WRITING SELF-DECEPTION TO HIS OWN DETRIMENT."

To convert these contracts into a "single unit", a contract with deposit and loan is "simply ontologically impossilbe."

The Rat Cap said...


As you can see from above, you did not refute the argument. You merely defined property. There is a difference between property and title to property.

Just because you own something, it does not mean you an enter into a contradictory contract and expect the courts to uphold it. You could not contract with someone to paint your home red and blue at the same time and ask a court to uphold it.

Only one person can own something at one time. This is simply a fact. You can not retain ownership and transfer ownership at the same time.

HaynesBE said...


I'd like to withdraw my recommendation of the discourse at NoodleFood on FRB. I just went back and reread all the comments (it had been a while since I'd read them) found much more chaff than wheat. The discussion here and from an earlier post of Doug's is far superior on this subject.

Doug, do you remember when that was? Per-Olaf and an Australian commenter raised some interesting points, and in the process clarified several concepts and terms. If you had a search box on your site, I could find it. (Hint. Hint.)

The Rat Cap said...


The post was at


You can search my site! In the upper left, there is a search box.

HaynesBE said...


Thanks for pointing that out. I even have one i that spot on my blog that I never know about. Oh well.

And thanks for doing my "search" for me.

Unknown said...


Thank you for pointing me toward the later section in “Capitalism” by George Reisman. It is disappointing to find that he says one thing and the a few pages later he says something else that appears to be contradictory, especially upon such an important topic (this said by someone who has written nothing of any great length and cannot be accused of having published anything). This seems to put George in the camp that expects the government to legislate the nature of a country’s currency. I am not sure that his comments fully explores the consequences. Nor do I see how his brief anti-fraud explanation fully meets his earlier objections to those who favor government action on this point.

I am not convinced by his discussion of the consequences on prices by the legislatively defined 100% gold standard. In spite of the invective leveled against fractional reserve bankers and gold smiths, their initial actions, how it all started, is that they saw that they had significant amounts of the stuff sitting around constantly over years. This is not savings. Savings consists of real goods, i.e., stuff you subsist on or use in production. If you have significant amounts of currency gold sitting around, not in circulation, you have actually reduced the amount of money and prices will have fallen. You have hoards. Prices will vary as these hoards go in and out of circulation.

On another point I am not clear, and that is, when the government wasn’t manipulating things, how rampant, extreme, and perverse was fractional reserve banking. The common practice of critics today is to talk about multiples of currency per measure of gold, e.g., ten to one, ten paper/digital dollars for every dollar of gold. That is certainly a perilous position. A conservative banker has the bank’s capital, plus bad loan reserves, plus the demand deposits (including deposits that have stayed in his bank for years), and reserve agreements with other banks (other private banks), plus cash on hand to meet his obligations. He is going to be deciding what to loan within that context. If the government is not manipulating things, is he going to put his bank in peril? What are the actual practices of banks in a free market without George’s legislative requirement?


Unknown said...


You have repeated your position several times now, and we have not been convinced, or at least I haven’t. It isn’t a case of a failure to consider the laws of identity and the excluded middle. My concern is two fold. First, it is that ownership is a concept in an economy that is adjusted as people find different ways of using things. We have developed many different applications over thousands of years. Examples (not in similarity) include water rights and several different layers of ownership of a single plot of land. I am sure that there are others. What your arguments fail to address is that people engaging in voluntary activity, with their eyes wide open, and all of the circumstances known, with no force involved towards themselves or others, is their responsibility and they may regard the ownership of the item in question according to what they have determined suits their interest. Possibly, in order to meet some of your points, it could be required that there be a simple name difference between those institutions that are depositories and those that use fractional reserves. A retailer, for example, could develop his own policies toward the different types of notes, and compete via his policies in the market place.

Second, in order for your position to have more impact, you need to address the issues that led to the fractional reserve practice in the first place. That is, you need to address the issue of idle deposits and monetary shrinkage. I am sure that the market attempted several different remedies, such as fees, conversion to savings deposits, etc. Unfortunately, I don’t know of a history of early banking practices. But it does seem clear that people don’t like paying fees to have their money on deposit, and fractional reserve banking is pretty much the alternative.

It is not the job of a legal system to curtail people’s voluntary activities, but to facilitate them. The various states of ownership in different sectors of the economy that have developed over the years attest that the law changes as people develop new and original activities.


The Rat Cap said...


Several points here:

1. We agree that I haven't convinced you!

2. You asked for history of FRB. I gave many references and touched on it in my post (which I linked):http://dougreich.blogspot.com/2009/01/tales-from-history-of-money-and-banking.html

In particular, De Soto's book is a treatise on this topic

3. You expressed sentiment that demand deposits don't do anything: "they had significant amounts of the stuff sitting around constantly over years"

A parking valet has tons of cars around him sitting doing nothing - he does not have the right to loan them out because they are not his to loan whether or not one could do some sort of calculation that would determine whether we would all be better off for it...

In fact, few leave much cash around, and if someone wishes to lend their money, they may do so...by enterining into a loan contract

4. You keep making the "people are entering into this voluntarily..." argument

Again, people can voluntarily enter into contradictory contracts, but the courts can not enforce them

An impossible contract is null and void

Also, there is a fraud perpetrated on anyone who receives payment stamped "demand deposit receipt" which is in fact a credit claim; it is also a fraud because only the first customers to demand their money could physically receive it while all others would be SOL; banks are not in a position (by definition) to perform their contractual obligation

5. You said: "you need to address the issue of idle deposits and monetary shrinkage." The fundamental issue is legal and moral. However, the economic effect of FRB is profoundly destructive in that it creates a boom-bust cycle by creating money that is not backed by actual saving thus leading to malinvestment.

People will always some amount of cash on deposit and they are free to loan the rest; I merely claim the law should distinguish these actions

6. You said: "But it does seem clear that people don’t like paying fees to have their money on deposit"

People don't like paying for anything!

If a bank, through a fraudulent practice, can offer them "paid demand deposits", of course people will love it just as they love a Ponzi scheme - until it blows up.

7. Recall that FRB was a fairly minor point in my post which I granted should be regarded as secondary to the MUCH MORE IMPORTANT and destructive system of central banking and fiat currency.

I agree that at this point, I think we are tapped out on this subject. If I haven't convinced you, I'll be ok:) It took me a year of thinking and reading to get to my current position. I wouldn't expect to change someone's mind in a day.

I have left many great references for review and encourage people to think for themselves.

There are much bigger problems than this to deal with, which was really the essence of my post.

I very much appreciate all the thoughtful comments!

HaynesBE said...


RE: Reisman--Although at first glance he may seem contradictory, I believe that with further study you'd find he is not. Part of what George does is to prioritize his battles--and in assessing the current situation of fiat money and fractional reserve banking, he identifies fiat money as the error which has the greatest destructive effect and so is willing partially let go of one battle to emphasize the other.

Also, I don't think he favors government legislating on currency other than in a "defining weights and measures" sort of way. In his sections on the nature of money, I think he is pretty clear in describing money as a market, not a government, phenomenon. To be sure of this, I would have to go back and reread those sections.

RE: a time when the gvmt didn't manipulate and regulate money and banks: I don't think there is one. However, the American era of Free Banking was relatively free. Richard Salsman has a couple of articles I found illuminating on this period which you may find of interest, specifically "Breaking the Banks: Central Banking Problems and Free Banking Solutions" as well as a chapter in The Crisis in American Banking ed Lawrence White, "Bankers as Scapegoats for Government Created Banking Crises in U.S. History." If you are interested in these and are unable to locate them, email me at haynesbe@gmail.com. During the Free Banking era, banks were indeed much more conservative and held much higher levels of reserves. Salsman clearly demonstrates the deterioration of proper banking principles with the rise of central banking policy.

RE some of your other points.

I have to think more about how you are defining money as not being savings. In a fiat system, I think you are absolutely correct. But, in a system of market-chosen commodity money, I think it would be. Commodity money is precisely that -a commodity, which would be the end result of production. Just because you can eat rice and not eat gold does not mean that a rice money standard is capable of "real savings" and a gold money standard is not.

Your point about piles of gold sitting idle giving rise to the practices of goldsmiths lending out deposits is where I hesitate to absolutely rule out any use of fractional reserve banking--even with Doug's cogent point about non-contradictory property rights. It's the question of whether you can rent your money to others while still owning it(without perpetrating fraud)based on the practical experience that people do not all claim their deposits at the same time. So far neither argument is fully satisfactory--which may be that I am just not spending the time to adequately sort it out.

RE: "hoard" --I prefer to use "demand for cash holding." The term "hoarding" brings with it a connotation of irrationality which I do not think is appropriate. In times of uncertainty, it can be extremely rational to want to increase your holding of cash---particularly if that cash is a commodity money.

Again, thank you for your challenging comments. I appreciate the opportunity to sharpen my thinking.

Burke said...

Doug writes,

"Just because you own something, it does not mean you an enter into a contradictory contract and expect the courts to uphold it. You could not contract with someone to paint your home red and blue at the same time and ask a court to uphold it."

When one deals with an FRB bank (in a free market), he gets interest and other services for depositing his money there which he is entitled to because of the risk he takes, because the bank may not be able to perform its promises for any number of reasons.

Just as with any investment.

I might add that the practice today is to transfer ownership of the money to the bank in exchange for the bank's promises, although the parties can enter into any agreement of their choosing in a free market.

As for two people owning something at the same time, it goes on all the time. It's called joint ownership. My wife and I own almost everything we have together. There is nothing "contradictory" about it.

This is irrelevant here, though, because there is no requirement that there be such joint ownership in an FRB agreement. One can transfer ownership of his money to the bank.

I give a bank my money to lend in exchange for interest and its promise to keep sufficient reserves on hand to let me use it too. When it lends part of my money to others, it takes back collateral. In doing so, the bank's assets are sufficient to use as collateral for such loans as are necessary to borrow cash to keep its reserves up if necessary.

If the bank is unable to keep it's promises for some reason--a bad economy, or whatever-I lose my investment.

So I made a bad investment.

I knew what I was doing. There was no fraud. I just made a bad investment as people do some time.

The idea that govt should "protect" us from such activities is nanny state thinking--or worse.

If people don't like FRB, they don't have to use such banks or accept their money. Prohibiting FRB violates the rights of those who wish to deal that way.

The Rat Cap said...


Before I get to my final statement on this, let me address a few of your points.

What you are describing as it relates to "joint ownership" such as a business, marriage, stock in a company, etc. is, of course, entirely valid, but has little to do with my argument.

A banking arrangement of the kind you have in mind would be similar to writing a check on a money market fund account. The check is accepted by a business with the understanding that the money market fund will have to liquidate securities from its portfolio and then send you cash.

Essentially, you are offering the business an IOU which is fine with me if the business chooses to accept it. These kind of 'callable' loan arrangements are fine by me because they are overtly taken as "loan" contracts. You are transferring ownership of the tantundem with the understanding that they will provide you with it upon call within a reasonable amount of time but NOT ON DEMAND which implies continous availability.

I have a problem with the idea that, by law, a demand deposit essentially becomes the property of the bank (as is the case under current common law) and that someone can legally pass a "demand deposit receipt" when in fact such a claim is in actuality a credit instrument. This has been covered in depth previously.

I do strenuously object to one thing you said:
"The idea that govt should "protect" us from such activities is nanny state thinking--or worse."

This issue is hardly a case of "nanny state" thinking. The issue of the proper definition of property rights under law and the issue of fraud is essential to a free society. As I have shown, historically this issue (as so many other legal issues) has had massive economic repercussions. To dismiss the volume of argument made here, in other posts, predicated itself on volumes written by prominent free market thinkers like de Soto, Rothbard, Von Mises, Hayek and Reisman in this way, is to grossly mischaracterize the nature and substance of the current debate.

With that said, I'm going to repeat something I said a few comments ago:

Recall that FRB was a fairly minor point in my post which I granted should be regarded as secondary to the MUCH MORE IMPORTANT and destructive system of central banking and fiat currency.

I agree that at this point, I think we are tapped out on this subject. If I haven't convinced you, I'll be ok:) It took me a year of thinking and reading to get to my current position. I wouldn't expect to change someone's mind in a day.

I have left many great references for review and encourage people to think for themselves.

There are much bigger problems than this to deal with, which was really the essence of my post.

I very much appreciate all the thoughtful comments!

Burke said...

Doug writes,

"Recall that FRB was a fairly minor point in my post which I granted should be regarded as secondary to the MUCH MORE IMPORTANT and destructive system of central banking and fiat currency."

Remember, I was stipulating a completely free market. In a completely free market there is no (govt-created) central bank, no fiat currency, and no legal tender laws.

There are just people doing what they want with their own property.

Presently, the govt dictates what we must use as money, which means that our present FRB system can be used to expand the money supply as much as the powers-that-be dictate in order to rob us blind.

If you do what Ayn Rand advocates and take all the force out of the transactions, you just have people doing what they want with their own property and the govt protecting their right to do so.

And there is nothing fraudulent about FRB as long as everyone knows what's going on.

Tom said...

I disagree. I think FRB is fraud, no matter how you slice it. I'm all for the free market as Rand would advocate, but she defined fraud as a kind of passive use of force, and I think this is a good example of that.

Imagine if you were storing grain instead of money, and you only kept 10% of reserves at any given time. That would clearly be fraud. The same is true of money.

Burke said...

Rand regarded fraud as a kind of force. She stated that it was intentionally interfering with another's perception of reality. And that, of course, is destructive, the same as physical force is.

But fraud is a misrepresentation made to another with the knowledge that it is a misrepresentation and the intention that the other be deceived by it and believed and relied upon by him to his detriment.

If a bank tells a depositor that it is warehousing his money with the intention of loaning it out instead, etc., that is fraud.

But the practice of FRB itself is just people doing what they want with their own property.

Tom said...

It's not about loaning it out. Of course the bank is going to loan it out, that's what a bank does. In fact, making a deposit in a bank is in actuality making a loan to the bank. If you don't want to do that, you could instead use a safety deposit box.

However, the crucial difference is between 100% reserve and 10% reserve. 100% reserve says that when you come to get your money back from the bank, they'll have it, or they'll have assets on hand to cover it.

FRB says they'll loan out 10 times the money that you loaned them, essentially creating it out of thin air (counterfeiting). There is simply no logical way to call that anything but fraud.

Burke said...

If you understand what FRB is and the risks involved and if a bank offers you a big rate of interest to play ball with them, who is being defrauded if you accept their offer?

No one.

I might add that in a free market no one has to accept the money they issue.

The only reason the do now is govt force.

Tom said...

They're loaning out money that they don't have. I don't know how else to explain this. It's the same as someone selling an acre of land to 10 people, saying that they each get an acre.

Burke said...

"Money" is anything that is used as a medium of exchange. In the past, banks issued their own money. It was backed in part by gold and in part by the bank's assets, assets which included collateral taken back on loans.

If a bank's reserves begin to fall low, it just borrows more from another bank in order to be able to redeem its issue for gold if depositors want it. It uses its assets, including the collateral it took back on loans, as collateral for doing such borrowing.

Burke said...

And again, in a free economy, no one has to accept their money.

Raman Gupta said...

A few people have made the comparison with grain or land. I don't think its valid. A grain is a consumable resource. Once a grain is consumed it is gone. More grain can be grown but that requires other resources.

Money on the other hand, represents wealth, which can be created through nothing more than man's mind.

A FRB currency (again, ONLY within a completely free market) represents a way for capital to be applied to the growth of wealth, while allowing the holder of that wealth (the "depositor") to benefit in the form of interest and in the ability to withdraw on demand.

Whether such currencies would succeed in a free market would be interesting to see. I suspect that a properly managed FRB currency would experience zero inflation as its money supply expanded in line with growth and productivity, while a 100% reserve currency would experience mild deflation while its money supply remained fixed amid growth and productivity.

But I suspect FRB currencies would be attractive to some who are willing to bear more risk, because in the long run they would stimulate more growth due to the more efficient use of capital.

And just to reiterate: the above arguments can only be made in a completely free system.

Tom said...

So, because a bank can borrow from another bank if its reserves or low, the whole system of counterfeiting is OK? You're talking about setting up an inverted pyramid that will lead to a devastating bust (just like 2008) every single time it is practiced. You're making the very same argument the statists make for the existence of the federal reserve, the "bank of last resort."

This is all a practical discussion though, and is simply skipping the moral clarification that this is a process of counterfeiting, or misrepresenting value, which is fraud.

Tom said...

Oh and money is not by any means a representation of wealth but instead is a representation of value. When wealth is created by the innovation of man's mind it comes in the form of improved efficiencies, profit margins, etc. You can produce more with less resources. Without counterfeiting, this would make prices fall, as they should as technology advances. With counterfeiting the prices remain steady because the value of the money has been fraudulently altered.

Burke said...

Under the gold system in the past, banks long issued their own money and practiced FRB.

No one had to accept their money. They did so only because they thought it was a good move financially.

And, as far as I can see, they were often right.

Frankly, I don't see how anyone operates a 100% reserve bank. As soon as they make a loan, they have depleted their reserves beneath 100% and have become a fractional reserve bank.

Burke said...

Fractional reserve banking existed because people rarely took their gold out of banks. They just traded the denominated receipts they received for depositing it there instead, and these receipts became money.

So banks did not need to keep a big supply of gold around.

So they just issued a lot more of such denominated receipts as loans and took collateral back for their loans.

The denominated receipts issued by the banks (their money) were thus still fully backed by valuable assets--the gold in their reserves, the collateral they took back for loans, and whatever other assets the bank had.

If for some reason they needed more gold than they had in their reserves, they had the assets available to buy or borrow it.

And again, no one had to accept any of these bank's money. They did so because they believed it was a good move financially.

And who are Murray Rothbard et al to be forcing them to use THEIR wealth the way they dictate?

Tom said...

Actually, in the past, the government got involved. An example is in the 1850s when midwest banks were allowed to make loans with absolutely nothing in their assets column, and people were legally barred from demanding payment in specie. The American government formed by the constitution has never been an actual free market, unfortunately. Hell it started with Hamilton immediately after Washington took office and made him Treasure Secretary.

But I digress. If a bank has an equal amount of assets and liabilities then it is called 100% banking.
So you're right, a bank is not supposed to loan out gold deposits. But it could loan out any of its preexisting capital and make money on that, and it could setup special accounts for investing, such as CDs, and loan out money on a 1 to 1 ratio to those accounts. How would they be able to grow? Simple, they'd be able to grow by the interest rate they charged. So if they had $1000 in assets, (deposits not being assets) they could make $1000 in loans, and collect 10% interest on those loans, so that next year they could make another $100 in loans. Or, if they sold a lot of CD's, they would make money off the differential interest rates. Would this mean that loan interest rates would go up? Probably, but who knows. It would be a real interest rate, unmanipulated by fraud or government.

And Burke, you're just making up nonsense now. You're basically saying that there should be no laws against fraud, because as long as you know you are entering into a fraudulent enterprise then it's ok. That's wrong. The fraud of FRB affects more than just the individuals who participate in it. It devalues the currency and it removes the financial legitimacy of the assets which are payed for by the loans.

Burke said...

Tom writes,

"You're basically saying that there should be no laws against fraud, because as long as you know you are entering into a fraudulent enterprise then it's ok. That's wrong."

I'm a lawyer, and I know a lot about fraud, both as a civil cause of action and as a crime.

If there is no misrepresentation, there is no fraud.

Whether or not dealing with a bank that practices FRB is a good idea or not is for each person to determine for himself. The claims of Rothbard et al that FRB is a bad practice are a minority belief, historically, even among advocates of free markets.

The reason FRB looks bad today is that we are forced to accept the money that banks practicing FRB use. And that allows them to inflate it far beyond levels that a free market would allow.

The solution is to repeal the legal tender laws and free banks to deal with customers as the requirments of the market compel them to deal.

Then FRB will rise of fall on its own merit.

Tom said...

The pre 1933 gold standard is exactly what you're talking about, and it failed miserably because it allowed conterfeiting.

When a bank makes a loan, it is making a representation of its ability to pay out the value of that loan. With a mortgage, it pays the seller of the property. With a construction loan, it pays the purchase orders of the job. And so forth.

Under FRB, it is making payments (liabilities) that simply do not exist, and therefore inventing money. This is fraudulent behavior. I am not talking about today's legal standards, I'm talking about reality.

Burke said...

If there are people who want to deal with FRB banks and people who want to provide that kind of bank to service them, they have an absolute right to do so. No one else has to accept the money issued by such banks or deal with them.

Declaring that the customers of such banks and the people who accept their money are being "defrauded" even though they are doing all this with full knowledge of what is going on is nonsense--just a rationalization for using govt force to dictate to people what they can and can't do with their own property.

In principle, no different than what the govt is doing now: controlling the banking system and forcing us to use only what they allow as money.

There are reasons that Ayn Rand rejected libertarians like Rothbard. They have no consistent underlying philsophy and are, in many respects, as bad as those they claim to be rejecting.

Tom said...

Funny, you're arguing the anarcho-capitalist view, yet you say Rothbard is wrong. Hilarious actually.

C.W. said...


Upon another careful reading of the first passage I find that Dr. Reisman didn’t actually say what view he himself supported. He just put a lot of space into describing how a free market would not support fractional reserve banking. His later support of government definition of the currency is then not a contradiction as much as it is inexplicable in light of his earlier argument. The government action is not necessary on his own discussion.


With due recognition of the number of words that I have put into this chain, I am astounded as to the amount of heat this subject generates. My own interest is primarily to try to keep things historically accurate and reality grounded. I find the arguments to legally limit banking practices to be founded on some presumed moral grounds or even the law of identity, and not on economics or historical events.

We have many examples of the banking system having difficulties due to government actions. I see no examples of the system, let alone a single bank, having problems due to fractional reserve banking. Systemic problems are always a sign of a systemic fault, i.e., the government. In a free economy, a bank or two may run into problems on occasion, but this will be true with or without fractional reserve banking. Bank failures will always happen, just as any other business will fail on occasion. It is impossible to prevent it by legislation. You might argue that 100% reserve requirements would make sure that people would get their money. Maybe. But that is the justification behind all of the laws that we are trying to get rid of, so let’s find another.

Arguing fraud when there are no lies or purposeful misrepresentations is self-refuting.

The argument by way of the law of identity states outright that people are real idiots for not being able to realize the contradiction. It says to me that only the writer was wise enough to see this special problem.

No one has addressed the decision by people who compare risks and costs and decide that the lesser cost is better with the risk they have evaluated. George does see that there will be higher costs with 100% reserve banking, but does not consider the possible market reactions.

The one issue that seems to me to be the most important issue for economics, which no one has addressed is that fractional reserve banking would have an impact on the money supply, expanding it by the extent of the fraction that banks would use. Over time I would expect that fraction to vary as the demand for credit varies (as would the interest rate). The interesting questions, I would think, would be what the fraction would tend to be, and how much would it vary. As the fraction would tend to stabilize, with experience and inductive analysis, the amount of money circulating would tend to stabilize, and we have the intent of the gold standard.

For the 100% reserve people, they need to answer the question as to how the changes in the demand for credit would be met. If interest rates increased, would that really result in money being taken from accounts and offered for loans? Would people tend to keep their unused balances in interest bearing accounts instead of fee sucking demand deposits?

I guess that what bothers me most is that the anti-fractional reserve banking crowd always seems to focus solely on the moral or legal arguments. Thus, the reasons why the issue came up, the context, the economics, are dropped, and we have this long series of repeating replies about the law of identity and legal issues. The tread ignores the reasons why fractional reserve banking started, i.e., idle deposits and the demand for credit. So, think about the economics and consequences of your position. What would be the results, and why? Get back to the context.


HaynesBE said...

Thank you for your follow up comment on Reisman. As to the rest of your comment, you have presented some things worthy of consideration. It will take time for me to sort it all out.Thanks again.

Burke said...

The bottom line is that a person's property is HIS property, and he is free to trade it in any manner he chooses. This is called free trade. It is not in any way anarchistic.

Forcing people to use this or that as money and to bank this way or that way is an infringement on the rights of those people.

Burke said...

C.W. writes,

"The one issue that seems to me to be the most important issue for economics, which no one has addressed is that fractional reserve banking would have an impact on the money supply, expanding it by the extent of the fraction that banks would use."

In a completely free economy with banks practicing FRB and issuing their own money that can be accepted or rejected by anyone, what does the phrase "the money supply" mean?

If a bank issues some money and no one is willing to accept it, is its money part of "the money supply"?

What if, say, only 5% of the population accepts it?

Something I wonder about.

Tom said...

You know the style of debate in play here is really frustrating. Those who support FRB simply say "it's not fraud" without actually proving anything. FRB involves a lot of people doing a lot of things and it has affects on third parties, not privy to inside knowledge of how the bank handles reserves. Misrepresenting the ability to collect assets is fraud and that's what it all boils down to.

Now instead of just telling me "no it's not!" how about actually prove that it's not fraud without using some statist logic like "it helps the economy grow"

C.W. said...


Hmmmm, where did you find "it helps the economy grow"? Are you referring to the variation in the demand for credit? If so, I think that I am the only one who mentioned that, and not as a justification.

The third party point is not trivial, to be sure. Yet, your own statement seems to be that the third party is ignorant of the situation, not that anyone is trying to put one over on him. If the reality of the situation is readily available to anyone who cares to look and this person just hasn't, it seems to me that he isn't looking after his own interests. Isn't this more along the lines of "buyer beware"? "Don't take currency unless you know the reality or soundness of the issuing institution", would seem to be the appropriate policy. With or without fractional reserve banking, the good reputation of a bank or issuing institution is an valuable property.

I, for one, am not just saying "it isn't fraud". I have in all cases presented reasons why it isn't fraud. This last reply of yours, about third parties, is the first one that actually adds to the conversation (appologies if I missed this point in earlier comments).


Burke said...

Tom writes,

"FRB involves a lot of people doing a lot of things and it has affects on third parties, not privy to inside knowledge of how the bank handles reserves. Misrepresenting the ability to collect assets is fraud and that's what it all boils down to."

I've given a definition of fraud above, which just happens to be its common law definition, used for hundreds of years.

The fact that some people are ignorant of business practices does not entitle them or their govt to run the lives of others with force, to compel others to deal with their own property in ways they dictate.

And you don't get to run other peoples' lives with force just because you are "affected" by what they do. No one is using force or fraud against you.

The Rat Cap said...


You have failed to address any of the substantive arguments I have made regarding your claims. Instead, you continue to merely assert definitions and your position and assail anyone who disputes your position.

About 800 comments ago, I offered an argument to the "everybody is freely entering into these contracts so it's not fraud..." and the "no one has to accept this as money..." as well as several other distinctions related to the difference between a monetary irregular deposit contract and loan or mutuum contract, the self-contradictory nature of the contracts, the relevant type of contract I believe you have in mind, and so on which I am not going to rehash.

If no one is advancing the ball on these arguments, then let's all agree to disagree and I would suggest anyone who is deeply interested actually read Jesus Huerta de Soto's treatise on this topic or any of the other scholarly pieces on the topic.

If anyone has anything new to say or anything related to the essentials of the post (non-FRB) that is fine, but this is getting repetitive and frustrating.

Burke said...

"About 800 comments ago, I offered an argument...."

I see only 93 comments here, Doug. Perhaps you could post a link here to it for those of us who were not around so long ago.

I didn't find the link you previously stated you posted.

The Rat Cap said...


If your interested, read back through all of my responses to all the questions starting from the beginning. I have addressed virtually every objection in some form or at least provided a reasonable essential argument. If after reading all of this and reading the references, you are not convinced, then so be it.

It took me a lot of time and study for me to take my current position. This is really a question in the philosophy of law, particulary contract and property law. How courts and philosophers deal with questions of property, property transfers, debt discharge, and its relation to fraud, contracts, etc. is complicated with a long history.

Reaonable people with a view towards limited government and free markets can disagree about these things. But, you should give the issue more attention because, in my view, I do not think your arguments have refuted the arguments of de Soto and others and I do not think you fully appreciate all of the issues involved.

With that said, I do appreciate your comments and all who have commented. But, again, if we are not advancing the ball, let's all agree to respectfully disagree.