Saturday, August 8, 2015

My Reply to Mr. Engel

C. Jay Engel has a wonderful site, Reformed Libertarian. 

[One] misconception is that the Ten Commandments… apply only to private individuals and not to governments. This notion, which has absolutely no foundation in Scripture, illustrates how far we have gone toward deifying government, for it is attributing divine qualities to rulers to say that they in their official (or private) capacities are exempt from the law. –John Robbins
A person who describes himself as a Reformed Libertarian seeks primarily to do two things: to express the fact that he adheres to the approach to political theory that was offered forth in at least one school of thought in the libertarian tradition; and also to maintain that his Reformed faith is central to his worldview which, among other things, speaks to the nature of his political theory.

He has commented on my recent post, Selgin and Salerno on Free Banking.  His comments can be found here.

I will offer the same caveat that Mr. Engel offered to me regarding my post.  In fact he wrote it so well that I will copy his, as I cannot agree more completely:

I agree with [Mr. Engel] on pretty much all things Austrian Economics and Libertarian political theory.

As far as I know, [free banking / fractional reserve banking] is probably one of the only things on which we dissent from each other.  I write this post with much affection for my libertarian comrade and the reader should know that I look up to [Mr. Engel] and consider him an excellent proponent of the Austro-libertarian ideal.

I offered a brief reply at the site, I will expand on this here.

From Mr. Engel’s post:

…the “free banking” position allows banks to extend “fiduciary media” (money substitutes that are not backed up by the money itself…). For example, if, say, gold was money and there was a set amount of gold in the bank, the free banking system would allow that bank, if it desired (it certainly doesn’t have to), to extend more claims on that money (like in the form of our green paper dollars) than can be redeemed at the same time. 

My free banking position has nothing to do with the bank’s “desires.”  It has to do with the contractual nature of the transaction; it has to do with the customer’s desires and a bank’s willingness to meet those desires.

A customer wants interest paid on his deposit and wants no fees or expenses for his account.  How does he achieve these if the bank is (physically or digitally) holding his money?  How can the bank afford such a relationship? 

If there was enough demand for bailment accounts, would these not spring up in the market?  How many people willingly sign up for zero interest income on cash balances (in a normal environment, obviously not today) and for paying fees when the alternative is available, albeit an alternative with a different risk profile?

If I wanted to ensure 100% reserves on my cash balances, could I not hold…cash? 

Conversely, the “100% reserve” position is that the above is contractually illegitimate and therefore, fiduciary media should be seen as fraudulent and illegal…

“The above” may or may not be “contractually illegitimate”; it really depends on the contractual terms.

To be clear: a contract that grants two people the same right to the same deposit at the same time would be illegitimate; it would be deemed an invalid contract. Depending on the details of the situation, it could be fraudulent.

This is not today's deposit contract.  It also has nothing to do with my position.  To my knowledge, it has nothing to do with the position of any of today’s Austrian / libertarian defenders of the practice – not one of whom, I suspect, is advocating fraud.

I have written before about the regulations underlying every deposit contract in the United States.  There is nothing in the regulations that state that an individual’s deposit will be held as a bailment for immediate withdrawal.  Instead, there are statements regarding the conditionality regarding withdrawal (Regulation CC, as I recall).

I owe a debt of gratitude to Anonymous July 30, 2015 at 10:11 AM, from the comments section of my post, who went even further than I have done – by going to the language in the contract:

I found the Citibank contract online, they call it "Client Manual: Consumer Accounts."

The pertinent element in it I saw was: "Unless otherwise expressly agreed in writing, our relationship with you will be that of debtor and creditor. That is, we owe you the amount of your deposit. No fiduciary, quasi-fiduciary or other special relationship exists between you and us."

They are the debtor, you are the creditor.  They owe the amount of your deposit.  No other fiduciary relationship exists – they do not commit to another relationship, like…holding your money as a bailment.

You might not get your money back, or maybe not exactly when you want it.

How is this illegitimate?  How is it fraudulent?  The only meaningful definition I can give to the term “fraud” is a violation of contract.

If there is “fraud” in the system (although I would not use that term), it is in the monopoly power of government-backed central banking.  This removes – or greatly diminishes – the disciplining force of the market; the discipline of providing positive or negative feedback via profit or loss, ultimately bankruptcy.

This is the issue, and the only issue.  Remove the monopoly; the market will resolve the rest – as Rothbard and Mises agree. 

See the following – a brief selection from the hundred or more posts I have written on free banking or fractional reserve banking:

Why Not a Free Market in Money?  If you don’t believe me, ask Mises, Rothbard, Sennholz, or Ballvé.

Free Banking.  Via a review of a book by Larry Sechrest (published by the Mises Institute), an examination of the irrelevance of the arguments of many of those who advocate for 100% reserves.

I will not repeat my acknowledgment of the potential negative consequences of such a practice.  I will also not repeat my conviction that the most stable financial system is one governed by market and contract.

There is no libertarian society without respect for the sanctity of contract.  There is no Austrian Economics without respect for the market.

I (and the market and history and others) have demonstrated that FRB as currently practiced can be achieved via voluntary contract and the market.  Demonstrate that 100% reserves can be achieved strictly via voluntary contract and free markets. 

Until then, you are advocating central planning.


  1. Thanks for the great response. I posted it and will respond sometime soon.

  2. What does the libertarian None Aggression Principle include? Surely it cannot mean just physical force? Is that the only libertarian principle? Is that not shallow?

    Human aggression comes in many flavors. What about verbal violence – proffering the choice of economic servitude – inhumane cultural control that limits the freedom of people to prosper (i.e. racism)?

    Surely a society must have some social standards beyond the none use of physical force.

    1. I believe all libertarian theorists would agree regarding physical force. I have read some debate regarding fraud, and you read some portion of my views here. I don't think the term is definable in a meaningful sense beyond violation of contract.

      Libertarian theory does not address the concept of "being nice." In libertarian theory, no one owes another kindness. The impersonal nature of free markets resolves many concerns about things like racism.

      There are many aspects of culture not addressed by or addressable via libertarian theory, despite efforts of many to broaden the definition.

    2. I have heard the term Christian libertarian - surely they are not amoral.

      Christians are idealists who oppose coercion – private and public. Do they identify themselves as libertarians mostly because they are anti government force?

    3. I imagine different individuals who would self-identify in this way have different reasons. At the same time, many Christians would consider libertarian theory to be something akin to communism - in any case godlessness.

    4. Is the main attraction of libertarianism freedom from government dictate? Is it the freedom to do bad things? Is the volitional doing of negative destructive things to self and others the goal? (excessive drugs, sex, and coercive greed.)

      Or is it the freedom from warring, spying, taxing, regulating that is most important to a libertarian?

  3. Bionic’s view per Engel that “…let the banks be free to issue fiduciary media and let the market sort out the consequences,” is not wrong but overlooks essential additional factors also relevant to whether fraud is being committed. Such as if that fiduciary media was faithfully represented as to its nature.

    Let’s say despite having no assets, I nevertheless open “Trust National Guarantee Bank” and issue “loans” of many billions of dollars. I make up unlimited amounts of money by just arbitrarily typing numbers into my computer printing out account statements showing huge dollar balances. Like Madoff did with stocks. When confronted, I say, “Didn’t you read the fine print? It said our relationship is merely debtor to creditor and I have no fiduciary duty. I just figured you enjoyed giving me real money in exchange for my unbacked IOU’s. This is all on you.”

    People getting loans from a modern day fractional reserve bank think the bank is buying their debt. In actuality, they are buying the bank’s debt. Because those aren’t actual dollars the bank is loaning them, only IOU’s. They just don’t know that.

    It is one thing for a seller to issue debt and represent it as such. Anyone buying debt knows that debt is only good as the solvency of the issuer. The buyer accordingly does due diligence. He insists on obtaining key financial metrics to understand how to fairly value the debt. He negotiates liens and all manner of contract terms to help safeguard the debt. There is no doubt the buyer is aware of what he is getting in exchange for his money.

    It is an entirely different thing for a seller to peddle his own debt as if it were cash. This is fraud….not by virtue of a few sentences in the contract fine print disclosing the debt…but by virtue of the vast marketing apparatus surrounding it which represents an implicit contract no less relevant that the explicit contract. For example, an account statement using dollar signs and deposit banking terminology implying in every possible way these are actual dollars redeemable in cash, not IOUs made up from thin air backed by very little.

    By analogy, imagine undergoing heart surgery to clear out a coronary artery. Emerging from the OR you wake up from anesthesia and you are told everything went well and you are going to be fine. A month later you suffer a heart attack. An MRI shows the coronary artery was never cleared, the coronary procedure never actually performed. You confront the hospital which responds, “Didn’t you read the contract fine print? There is a single line buried in there disclosing we don’t actually have any doctors here. We don’t actually do surgery. We just have all the trappings and give you the experience as if we do. Ha ha.” Apparently Bionic would consider this legitimate and not fraudulent.

    1. This is like Anon August 8 saying, "you know, when I bought that make-up I thought I would look just like the cover-model on Vogue."

      I will summarize your post. People are stupid. Someone should protect people from being stupid. People don't know how to read. We should protect people from their own illiteracy.

      People are too dumb to realize that you can't get something for nothing - interest income and no fees for a storage service. They store my deposit, don't charge me AND pay me interest!!! I wonder why Public Storage can't do the same for my boxes.

      That libertarians / Austrian / anarchists think like this is stunning to me.

      Perhaps Anon August 8 should start a petition about Public Storage, since he advocates believing in fairy tales. Maybe have BankAmerica buy them out and expand the business model into other fields.

      These same stupid people haven’t lost a penny of deposits since 1934, yet somehow this is compared to a quack doctor. I know of no other business with as high a track record. Of course, now you will write a couple hundred words about how bionic supports the Fed and FDIC.

      I have had this people-are-stupid argument thrown at me 100 times, it sounds stupider each time. The language in the contract is plain; more importantly, nowhere in the contract is a bailment proposed. The business model cannot work if the deposit is held as a bailment.

    2. Your needlessly heated response mischaracterizes my position.

      Of course you don't support the Fed and FDIC. Your anti-monopoly position is quite clear and we agree 100% on how unquestionably indispensable that is. But in my opinion that is not enough. Fractional reserve banking, to be legitimate, must represent itself for what it is: peddling of unsecured debt. Just like a "hospital" providing fake surgical experiences may legitimately do so as long as it represents itself as an entertainment provider, not an actual medical provider.

      My argument is not a "People are stupid and must be protected against themselves." My argument is that implicit contracting is a valid form of contracting along with explicit contracting. My argument is how something is marketed is relevant to the unwritten expectations a contracting party may legitimately be expected to have surrounding the contract.

      A diner eating at a restaurant implicitly represents that he will pay money in exchange for the food despite not having signed explicit terms saying that. The restauranteur implicitly represents that the food is not formulated to include lethal poison despite not having signed explicit terms saying that. It does not make people stupid that they make such presumptions. Just as it does not make people stupid that they presume something held out to be money in every possible way is being represented to be money.

      This is the essence, the dictionary definition of fraud. Your line of reasoning seems to deny the existence of fraud. It seems to say only violations of explicit contract terms, only breach of contract, is a wrong. Some libertarians believe that fraud is not a violation of the NAP. If you feel that way, you should let us know.

      Makeup on women making them look better than they do is fully disclosed as to its true nature. It's capabilities of concealment and highlighting are core to the very definition of what makeup is. This is well-understood by women using it and more importantly well-understood to men who behold such women. A woman using makeup to conceal her true skin coloration is prima facie disclosing that concealment visually to anyone glancing at her. They can see the makeup right there on her face. She is not attempting to represent her made-up face to be her un-made-up face any more than a person wearing a Halloween costume is attempting to represent himself to be an actual ghoul. Makeup thus is not fraudulent.

      By contrast, a transvestite peddling sexual services must disclose he is not female when contracting. To do otherwise is fraud, because the buyers of his services may genuinely be misled into thinking they are buying one thing when they would actually be buying another. Same with modern day fractional reserve banking.

    3. When people start arguing that contracts are something other than what they are, there is no hope for libertarianism or free markets.


      When the written contract is clear as to what it is and what it isn't, all the whining about what someone wished the contract to be won't change that.

    4. I feel this is an appropriate moment for anyone reading this exchange to watch the South Park episode HumanCentiPad.

      "You agreed!"

    5. There was a time when people were not so confused about what a bank did with their deposit. I am not so sure people - outside of a sliver of the Austrian / libertarian community - are confused today... not that it really matters.

      In any case, there was a time when what the bank did - and didn't do - with the deposit was well understood.

      I suggest watching 'It's a Wonderful Life."

      Maybe this knowledge is lost, or maybe it is only lost on a portion of the people who occupy this small corner of the world.

      I am guessing the general population, at most, doesn't even think about it. Why should they, when the banks deliver with 99.9999999% success?

    6. Yes, yes, that illustrates my point. Back before the 1860’s when banknotes were issued by private banks, the question of what those notes actually represented was more clear. No one thought they were money in the sense of gold because the notes actually indicated on their face that they were just credit instruments printed up by a particular private bank. You see how labelling is a fundamental part of the implicit contract a customer forms with a bank. That's exactly why people back then readily factored in the risk of bank default when valuing those banknotes. It’s not that they were smarter about banking than people today. It’s that the darn note literally said on its face what it was. You see how the transparency of what is actually being issued by a bank is a crucial enabler for free market dynamics to function around those instruments.

      I believe simply naming the bank on the note was not enough transparency. As debt instruments rather than currency, those notes should have also included information on the leverage level of the bank, its assets, and associated relevant metrics including any guarantees by bonded 3rd-party entities the bank would not exceed certain windows. Only then people could have any hope of understanding and evaluating what risk-adjusted value this piece of paper issued by a fractional reserve bank actually had. It was only by appreciating how severe such a discount could be could people have woken up to appreciate the value of a 100% reserve deposit bank, creating market demand for those. That’s a key reason deposit banks don’t currently exist. Because people have been systematically bamboozled into thinking fractional reserve banks are the same thing.

      The current Federal Reserve system makes account balance and FRN valuation impossible. Not merely because of the monopoly and regulation but even more importantly because of the intentional pervasive obfuscation, opacity, misinformation, and misdirection by banks and government about what bank account balances and FRNs actually are.

      And c’mon, you know the 99.9999999% success rate of our current banking system is the success rate of a gun. That is, the success rate of armed enforcement of the Federal Reserve Act, Federal Deposit Insurance Act, and Internal Revenue Act which enables them. This success rate has nothing to do with actual banking success rates.

    7. The piece of paper in my wallet clearly states "Federal Reserve Note," for my purposes, "Note" being the operative term.

      Please continue your welfare state desires - people aren't bright enough to live in a complicated world, we have to babysit.

    8. My insistence on transparency of both implicit as well explicit contract is not a welfare state desire. As an anarchist, I have no state desire, welfare or otherwise.

    9. On whose behalf do you insist? Who are you to tell others what is sufficient transparency for them to make a deal?

      You are free to start a consumer advisory service.

    10. On behalf of myself and any I would do business with and no one else. I am no one to tell others what is sufficient transparency for them to make a deal. I would never sanction use of force to impose a particular legal definition of fraud on those who elect to employ a different legal definition amongst themselves on their own property.

      Having said that, in a free society I would decline to enter the property of or do business with anyone using a private legal system that does not roughly recognize fraud as I have outlined it above. That is, a legal system that does not recognize how context, convention, common expectations, and supplemental representations comprise implicit contract terms. A legal system where substantial misdirection and misrepresentation of material contract terms are allowable. I’d be terrified of attempting to do business with someone under such a legal system. I’d expect the general air of mistrust arising from such conditions and need for custom 1,000 page explicit contracts to safeguard the simplest transactions would leave such a legal system popular with no one.

      I'd rather an optimal legal standard for fraud be debated, compromised on, and mutually agreed upon by men of good faith. Contract law as embodied in historical common law is by and large just that, and it embraces my notion of implicit contract terms. I’m confident by the standards of historical common law private entities engaged in fractional reserve banking in the same form it is currently practiced would be judged to be committing fraud.

    11. Anon August 8

      Why so melodramatic? Why not just open a bailment account and be done with it?

      Heck, Send me your money. I will hold it for you - I will not lend out a penny; you can write the terms so there will be no shenanigans pulled by old bionic.

      I will do it for a $50 fee to open the account and 2% per year storage fee. I am open to a counter-offer once I see the specific terms.

    12. I feel the same horror that many felt observing Bernie Madoff make off with the life savings of tens of thousands of people. Savings that would have meant lifesaving health care, the ability to retire instead of work in old age, the chance to start new family, etc. Bankster fraudsters are doing the same thing right now, only legalized, to hundreds of millions of people, in slow motion. Through the heavily obfuscated mechanisms of Federal Reserve style fractional reserve banking. The enormity of the resulting human devastation when added up is worth a little agita in my book.

      "you can write the terms so there will be no shenanigans pulled by old bionic"

      No way! You are certainly clever enough to find loopholes in terms no matter how many I write. Since you have previously declared you hold the context, intent, and public statements of those signing an agreement to be irrelevant to interpreting the agreement and you believe misinformation and misdirection by contracting parties to be legitimate, I would be crazy to take your words of assurance at face value and contract with you. That would just be a wealth transfer from me to Bionic!

    13. The concern you fret about is the monopoly. You even state it in this comment, and you don't even realize it.

      The only misinformation and misdirection (your words, not mine) in this conversation is by a sliver of the Austrian world; no one else talks about this as such. A bank teller never told me this when I deposited the check.

      Anyway....Don't trust me? I will even take out a security bond in your name - of course, the cost of it will also be charged to your account.

      Yeah, I know. This bailment bank idea isn't sounding like all it's cracked up to be - you see why people willingly accept the alternative. It might actually cost you a lot of money to open an account.

      Find a friend. Pay him $50 plus 2%. Better yet, keep your cash in a safe.

      I am certain you won't even do any of these.

      But you will keep blabbing on about this issue that is not an issue for almost anyone who actually deposits money. They all seem quite satisfied with the service.

  4. You’re making the terrible argument that uninformed consent is on par with informed consent. “You agreed!”

    You ignore the elaborate shell game employed by the government/banker partnership to conceal the costs of fractional reserve banking. To keep the fraud hidden from sight and thus sustainable, its costs must be shifted into inflation.

    The cost of bank defaults? Covered with FDIC bailouts funded with Fed-printed money. Bank defaults are handled by the government with extraordinary secrecy perfectly concealing them from the public – 60 Minutes did an excellent segment on this.

    The cost of the unholy yield bankers reap from lending out 10x more money than they actually have? Comes uniformly out of the pockets of everyone using the currency via inflation.

    Are people pointing the finger at fractional reserve banking to complain? Of course not. First of all they don’t even know what it is, much less that it’s in use thanks to a systematic campaign of misinformation and misdirection. Second of all they don’t perceive its costs. They just know inflation occurs. They just see bread in the store costing more than it used to. They don't know why. They don’t know where that extra money goes. They are assured by the government it’s all normal and natural and a 2% inflation rate is a healthy thing to be desired. The mark is duped.

    So you may continue to defend fractional reserve banking by pointing out that everyone blindly signed the agreement opening a bank account, no one is complaining, and everyone is going along with the scheme. This is not a convincing argument. A fraud scheme wouldn't be a very successful fraud scheme if its targets recognized it for what it was.

    If we sought to obtain informed consent, that is, we sat down any ordinary individual and explained to him what fractional reserve banking was, how it worked, and walked him through its true costs including all indirect costs accruing back to him via inflation and asked him if he agreed to the scheme and to shoulder its cost burdens, I’m quite certain he would scream, “No!”

    1. Every complaint you make about FRB has its foundation in the monopoly. Eliminate the monopoly and the market will regulate the practice. You are too consumed with religion to see this truth. Your ignorance on this drips off the screen with every word you type.

      I could almost use your words to write a post about the monopoly.

      As to your complaints about deception in the contract, start a babysitting service. You have convinced me that in your version of a libertarian world that adults must be treated like children.

      You have no idea where your wishes lead (or maybe you do). They lead to chaos. They lead to begging the government for solutions. If individuals cannot rely on contract, there is no chance for a libertarian world.

      I take words seriously and you call me a crook; you don't take words seriously and believe you are righteous.

      And as you haven't agreed to pay the cost for storing your money as I have proposed, you are also a hypocrite. You haven't screamed "no."

      An ignorant, self-righteous hypocrite. I think we have spent enough time on this matter.