Legal Tender

Nick Badalamenti August 19, 2016 at 10:22 AM

In all the discussions surrounding FRB and its evil, it always seems like what is ignored is the role that "legal tender" laws play in all of this.

Under a system in which people are able to choose what currency they can use without compulsion (tax), penalties, etc.

I believe your second sentence makes clear that it is more than legal tender laws that present an issue; further, I am not sure legal tender laws present all of the obstacles attributed to it regarding the issue of competitive currencies / etc.

Legal tender is currency that cannot legally be refused in payment of debt. The Coinage Act of 1965, specifically Section 31 U.S.C. 5103, defines legal tender as "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

To my understanding, legal tender must be accepted for the reasons (and only the reasons) listed: all debts (public and private), public charges, taxes, and dues.

This does not preclude agreements for payment in other forms, nor does it force a vendor to accept legal tender in all cases for goods and service (where there is not debt to discharge):

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no federal statute requiring a private business, a person or an organization to accept currency or coins as for payment for goods and/or services. Private businesses may adopt their own policies on whether or not to accept cash as long it doesn't violate state law. For example, a business may refuses to accept payment in pennies or large denomination bills as a matter of policy. (Emphasis added)

One can certainly accept gold or anything else as payment, I am quite certain.  Of course, this raises issues that you mention in the second sentence (taxable event).  But this is not a legal tender issue, it is a tax issue.

To have a reasonably effective possibility of a competitive currency / money / credit / banking system I believe requires the following:

·        The government must end all monopoly-sustaining practices: government mandated central banking (private cartels will arise and I find these acceptable as long as private means private), government deposit insurance schemes, government regulation, etc.

·        The government must accept tax payment in any form – certainly at minimum in the form the income was earned / recorded.

·        Currency transactions are not taxable events.

·        End legal tender – the tool to force acceptance in a form of payment for debt, taxes, etc.

I suspect I am missing one or two items.

I regularly point out the monopoly as the problem because I believe it is the most pernicious component.  Without the monopoly protection the emperor will be exposed as naked.

Sound Money

Part 10,253

Eric has a question of Walter Block:

All I hear and read from libertarians is that we need sound money, and specifically our money to be based on gold.

Note: Eric is asking about gold as money in the context of libertarian discussion.

To me, the gold standard is totally overrated. It would expressly require force that violates the NAP.

Eric is quite correct – in the theme of this line of discussion, I would say he is 100% correct!

Why do libertarians hold the gold standard so closely?

As libertarians, I do not understand why either.  As Austrians?  I will come to this later.

Money should be whatever people deem as money, whether it is tied to gold or rice patties or nothing.

Eric is 100% correct again.  That somewhere back in time some people chose gold, or that gold has demonstrated its effectiveness as good money is a secondary (and irrelevant) issue to the question at hand.

Eric offers one example of competition in money and currency.  My intent is not to address his specific example, but more importantly the aspect of competition.  In this, Eric comes to the right answer:

The competition that would ensue for the “best currency” would be fantastic, and a boon to the common man.

Competition is the key.

I’ve been told I am crazy by many people who are in fact crazy (those that believe in government)...

Eric, there is no shame in this; I have been told I am crazy by many people who don’t believe in government.

…but I needed to ask a non-crazy, like you [Walter], if this idea is, in fact, crazy.

Walter does not answer the question, instead sending Eric a reading list.  I am familiar with some – but not all – of the items listed.  My guess?  None of these will address Eric’s question, at least based on my experience of reading dozens of articles, books, etc., on this topic.

Libertarian theory is the non-aggression principle based on private property – and in this discussion, respect for contract (inherent in “private property,” but worth noting).  What might be derived from this on the topic of “good money and currency”?  Nothing more than “money is whatever two or more people decide.” 

Nothing.

One-hundred percent gold requires the initiation of force.  What if two or more decide on silver (recognized as an alternative even by some proponents of gold)?  What if two or more decide on a currency backed by 40% gold?  Ten percent?  Half gold and half silver?

What objection, in libertarian theory, can be raised to stop them? 

None.

Now…what about the objections from some corners of the Austrian world (including my favorite corner)?

To my knowledge, Austrian economic theory is by far the most consistently free-market economic theory to be found.  Austrians accept free markets and competition in all facets of economics.  Why not when it comes to money?

Gold offers sound money.  Competitive money in a free market offers the soundest money – and more sound than a requirement for a 100% gold-backed money.  For an economist to suggest otherwise calls into question the entire belief in free markets.

(In a free-market, there will even be fractional-reserve banking…but that is a different topic entirely.)

Update: Mike Rozeff has offered a reply or two to Block; a very good example is here.

100% Reserve Banking

Switzerland will hold a referendum to decide whether to ban commercial banks from creating money.

The campaign - led by the Swiss Sovereign Money movement and known as the Vollgeld initiative - is designed to limit financial speculation by requiring private banks to hold 100pc reserves against their deposits.

Not a gold standard:

The Swiss federal government confirmed on Thursday that it would hold the plebiscite, after more than 110,000 people signed a petition calling for the central bank to be given sole power to create money in the financial system.

If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, "while the decision concerning how new money is introduced into the economy would reside with the government," says Vollgeld.

A central bank / Irving Fischer standard.

From the Vollgeld initiative site, a Q&A:

Q: How can the Swiss National Bank know how much money is needed?

They can’t know.

A: The Swiss National Bank needs the sovereign money reform to be able to fully control the amount of money in circulation.  The Swiss National Bank collects the best statistics on the economy, and therefore has the best overview as to how much money is needed.

They can centrally plan. 

Nothing market oriented about this initiative; nothing to cheer from a free market perspective.  The initiative concentrates even more power in the central bank – instead of decentralized decisions about digit creation, only the monopoly central bank will be allowed this task.

The initiative demonstrates (I won’t say proves, although I am certain this is anyway the case) that it will require force to ensure 100% reserve (against gold, any commodity, electronic digits or whatever) banking.  It cannot happen absent the initiation of force by non-market actors.  To put this in place will require voters tasking the government to stand between willing economic actors and hinder a transaction.

Therefore 100% reserve banking – even against gold – cannot provide the most relatively stable money and credit system.  Inherently a free market – driven by prices and profit and loss (with all its consequences) – is the best means by which to provide money and credit in a manner and type desired by the market, and do so in the most stable manner.

End central banking; end the government’s backing of banks; end deposit insurance; allow banks to fail.

The solution lies here – not in any preconceived notion of proper banking.

End the Fed (and the SNB, and all the rest).

Comments (and More on FRB)

I have really enjoyed the last couple of months as bionic mosquito.  I always enjoy my time on this project, but during the last two months there has been much in the way of wonderful comment and dialogue.  I always enjoy this aspect as it affords the opportunity for me both to learn and to hone my arguments and views.

In this time, I have written about 35 posts.  There have been well over 500 comments – several of these were mine, of course, but still a sizeable number for this blog in such a short period of time.  The topics most commented on (not in any particular order): libertarians and culture, right-libertarians, left-libertarians, bankruptcy, abortion, free banking / fractional reserve banking.

A very robust dialogue.  Thank you one and all.

There was a comment on my recent post regarding fractional reserve banking; I was accused of being “dogmatic.”  I tell you, I sulked all day, working through what was presumably intended to imply that I was closed minded.  I finally decided I liked the label; a nice post followed, something that helped me to clarify my own dogmatic thoughts.  I even have received 3 “likes” for the post! 

I know at times my frustration on the topic of free banking / fractional reserve banking comes out in my comments (well, on other topics as well).  I would like to explain….

The story begins with my dogmatism, I guess.  I listed several of my beliefs and views in the above-referenced “dogmatic” post.  From these, I reach conclusions on various topics libertarian / Austrian / etc.

I enjoy being challenged on these – and the challenges come on two levels.  Certainly, conclusions can be challenged.  As an example, I have absolutely zero doubt that Walter Block comes to his conclusion favoring evictionism from what he views as an unadulterated view of libertarian theory.  I come to a different conclusion regarding abortion – I also believe I come to it via an unadulterated view of libertarian theory. 

Now, one or the other of us might be applying the theory incorrectly; or, maybe libertarian theory doesn’t offer a clear-cut answer.  But I do not question Walter’s intent to stick to principle (call it dogmatic) when applying libertarian theory.

In other words, conclusions on real-world events grounded in theory offer one level of being challenged.

But on a deeper, more fundamental level – the dogma.  I feel quite settled on the six items listed in the dogmatic mosquito post.  If you want to challenge me on the basis of any of these – like my belief is not well-placed – I say pack a lunch, because you will be at it for some time.

But don’t pack dinner.  If you don’t hit me with your best shot within a couple of tries – something that causes me to think “you know, free markets might actually be a bad idea” or something like “I think saying hello with a punch in the nose and taking your candy bar is a good way to order society,” well I will grow tired.

After two or three back-and-forths, I will be done with the conversation – I won’t pay much attention to the next time you say the same thing, or something even smells like the same thing, or something that seems like you don’t understand what I have written…more than once.  You may not like the way it ends; this is of little concern to me by this point. 

It certainly happened on the recent FRB post: I have a firmly held view about the sanctity of contract, and an equally firm view about how to resolve disputes between parties if there is a disagreement regarding the interpretation of a contract. 

I believe allowing for violations of either of these views will lead a society to chaos – just open the door for people to say (and get away with saying) “OH, I didn’t know that THAT is what I signed up to do” and see how far your free-market libertarian world will travel – a perfect door opener for government intervention, protecting the little guy and all that.  Alternatively, I believe that when people understand that contracts cannot be ignored in such a manner, they will quickly learn how to order their relationships accordingly.

On the topic of fractional reserve banking and free banking (and banking generally), I have read Mises, Rothbard, Sennholz, Salerno, Ballvé, de Soto, Sechrest, Selgin, North, White (and others).  Some of these authors are for and some against.  I have read dozens of posts at LvMI and elsewhere.  I have commented and gone back and forth on several threads at LvMI and The Daily Bell.  I have asked a real expert on money and banking for the best critique of FRB, for the most clear-cut argument that it is fraud.  I read this as well (it was Rothbard – who I read, not who I asked!). 

My earliest post on these topics was almost five years ago – December 2010 (it’s still pretty good, I think).  I have written almost 130 posts with one or the other label (I know several posts have both labels, so perhaps 100 posts total).  In these posts, I have commented dozens of times to feedback.

Look, I am not saying that it isn’t worth trying to shake me on my view; I am saying that I have already read and considered the views of the best authors on this topic.  I have responded to the same criticisms more than once.

I have read clarity twice on this matter of fractional reserve banking and the fraudulent (or lack thereof) nature of the practice.  The first time was more a moment of enlightenment – a light-bulb moment – from an interview of Joe Salerno, at The Daily Bell – about painting a house both red and green at the same time.  It can’t be done, it is an impossibility.  It took me a while to properly understand and then internalize and contextualize his meaning; when I did, it offered much clarity on the matter.

The second was the definition provided by Mr. Engel.  Mr. Engel gets Joe Salerno’s meaning!  I agree with Mr. Engel completely on the issue of FRB when applying his definition.  The problem, however, remains – and is two-fold: his definition does not describe today’s banking practice, and his definition is not consistent with the definition offered by other sources.  I await patiently his promised clarification on this matter; it is now nine days and counting.  Perhaps I have missed it.

I suspect if the commonly accepted and understood definition was the one provided by Mr. Engel, all proponents of FRB would be against it – as a matter of contract and potentially fraud.  I know I would be.

If you want to criticize my views on FRB, I am open to it.  Just know that you better come stronger than or with something different than some of these aforementioned authors.  Stronger than Rothbard on fractional reserve banking?  That’s a high hurdle.

Anyway, returning to where I began: thank you all for the dialogue!

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.

Fractional Reserve Banking: Much Ado About the Wrong Thing.  The issue is the monopoly.

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.