It is an error common to many in the Austrian school.
It has been some time since I have written on this topic (here are over 60 posts on this topic), but here Block has offered a simple example for examination:
In fractional reserve banking, A lends $100 to B, the bank. B gives A a demand deposit for that $100. B keeps a reserve of 10%. B lends out $90 to C. B gives C a demand deposit for that $90. Thus, both A and C are the “proper” owners of that $90. This is incompatible with libertarian law, since only one person may own one thing at a particular time.
There are two words in the above that, when properly examined and understood, demonstrate in very simple terms the flaw of the fractional-reserve-banking-is-fraud concept. These are “lends” and “own.” Person A “owns” something. In Walter’s case, he owns $100. He “lends” this $100 to bank B. In this, the flaws of the FRB-as-fraud claims are fully exposed.
What happens when someone “lends” something he “owns” to another? He gives up the use of the item during the time it is lent. He still owns the item – that is, he has certain rights in property of the item – but he has also given up certain rights in the property.
A simple example is a home rental contract. I understand the differences of this and FRB, and don’t intend to debate why the example isn’t perfect. It is merely sufficient for my purpose.
Does the homeowner give up ownership of the home when he rents it to a tenant? No, the home is still his. However, the homeowner has given up the right to live in the home for the duration of the lease. The homeowner still has rights in the property (the home) while giving up certain rights (occupancy).
Depositor A has given up $100 cash from his pocket. He lends this to the bank; this term, lends, should not be overlooked – and unlike many critics of FRB, Block does not overlook it. Depositor A has lent the bank $100 – he did not ask the bank to store $100 as a bailment; he lent the bank $100.
By doing so, he gave up certain aspects of the property – he no longer has the $100 in his pocket. Instead, he has a document from the bank stating that the bank will return $100 on demand.
(As an aside, this demand is conditional, as stated in the contract; I have written about this too many times to count, and so won’t get into it here. Yes, yes, yes…if everyone with a demand deposit demanded their deposits at the same time, the bank would be unable to fulfill the requests. Business failure isn’t always fraud – sometimes it is just poor entrepreneurship. Suffice it to say, since the founding of the FDIC, banks have made good on this contract virtually 100% of the time – a level of performance unmatched by virtually every other industry.)
Back to Block’s example: Depositor A gave up certain uses of his property. The bank has acquired these uses in exchange for something valued by A. While A “owns” the $100, he lent it to the bank for the bank to use. The bank uses the $100 to lend to a third party – borrower C. Something like a sub-lease on the aforementioned home.
A and C do not own the same property at the same time – Walter is just plain wrong about this. A owns the property but gave up certain rights to the use of his property when he lent it to the bank. The bank gave those rights to C. C does not “own” the $90 any more than a tenant “owns” the house he is renting. The tenant merely has use of the house, as C merely has use of the $90. Both the tenant and C are obliged to return the property under the conditions of the respective contracts.
A doesn’t have use of the $100 cash no longer in his pocket – he has a contract from the bank instead. A gave up $100 cash in exchange for the terms in the contract with the bank. One of these terms (but not the only one, else A would likely not enter into the agreement) is that the bank would return $100 to A on demand (with certain exceptions, again I won’t get into these here). A still owns the property; C does not.
The control, use, and disposition of property is divisible – and can be separated from ownership via agreement of the owner. As Walter states, property can be legally owned by only one individual (or an entity established for property ownership). However, that individual can give up control and use of the property in exchange for something valued by the property owner – the ownership is now conditioned as is the use of the property.
I thank Walter for offering a simple example to demonstrate this point.