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Essentials of Economics, by Faustino Ballvé
In Chapter 5, Ballvé examines money and credit – a topic
near and dear to my heart as it seems to be the one area most likely to divide
the Austrian faithful.
After a brief outline on the origins of money and banking, Ballvé
discusses the paying of interest on deposits:
In this way money accumulates in
banks, and as depositors do not normally need to have all their money at their
immediate disposal, banks pay them interest (with certain exceptions), the
amount being smaller in the case of demand deposits, which can be withdrawn by
the depositor at any time without prior notice, and larger in the case of time
deposits, which are not payable before a definite date. Keeping on hand only what is needed to
provide for anticipated withdrawals, the banks lend the surplus, charging the
borrowers a higher rate of interest in order to earn a profit and cover their
risk…..
Here Ballvé broaches the subject of fractional reserve banking. He does not state the nature of the contract
between depositor and bank. However he
mentions without a hint of concern the idea that even time deposits are to be
loaned out.
Of course, by contract fractional reserve banking cannot
exist. Parties cannot contract to a
mechanism where two or more parties have equal and complete claim to the same
asset at the same time. I believe I am
on safe ground here, as I am following in the footsteps of Joe Salerno (full
disclosure, as I have learned more on this subject I have come to better
understand and agree with Salernos’ comments here):
Dail Bell: Do you believe in
private fractional banking or should it be illegal?
Dr. Joseph Salerno: I am neither a
philosopher nor a legal theorist, but I believe in the absolute right of
individuals to enter into any voluntary contract that they choose. But a
contract must be meaningful to be enforceable. If I pay you for a promise to
paint my house red and green all over, this is not a contract but an absurdity.
Likewise if I pay you (or even if you pay me) to store my motorcycle in your
garage so that it is always available for me to use it and I grant you the
freedom to rent it out at will. My point is that the deposit contract as modern
free bankers conceive it, is a meaningless fiction. It implies that a sum of
money can be both maintained on deposit for instantaneous withdrawal by the
depositor and lent out to a borrower.
Now I am not saying that a free
banking deposit contract can never be formulated in a meaningful way. But then
it would not be a "deposit" contract at all, but a short-term credit
transaction.
Thus to answer the question you
posed: I do not believe that "private fractional-reserve banking," as
it is commonly understood in debates among libertarians and Austrians today,
should be illegal. It is a self-contradictory concept that could never be
formulated into a meaningful contract on a free market.
Two parties cannot both have claim to the same asset at the
same time, and as I have previously outlined, this is certainly not the case in
U.S. (and I feel safe to say, developed world) banking – the documents are quite
clear that there are situations where the deposit does not belong to the
depositor. More so, logic dictates this,
as a depositor cannot expect to earn interest (and also not pay any storage fee)
on assets merely being stored for immediate withdrawal.
Ballvé does not see world-ending consequences in such an
arrangement, or if he does he remains silent on this. The method by which he describes this
suggests that he sees the idea of loaning out even demand-deposit funds as
normal and acceptable (albeit, in a free-market context, which is explored
shortly).
It would seem that the only way around this is to establish
a true deposit contract. I feel on safe
ground to suggest that one cannot be had today at a typical banking
institution. If one wants a true demand
deposit account, the only way I see doing this today is to withdraw currency
and place it in a safe.
Back to Ballvé: while he does not comment negatively on the
idea of demand deposits also being lent out, he does not remain silent on the historic
progression in banking that has led to the true corruption in the industry:
And it is at this point that two
kinds of governmental interference thenceforth take place. First…the practice of assaying and monetizing
them is established….then, the government proceeds to establish a control over
the banks in order to prevent them from issuing more fiduciary media (i.e.
money substitutes) than they have cash on deposit. This control is entrusted to a central bank,
to which the government grants a monopoly over the issuance of banknotes
redeemable in metallic money. More recently,
these banknotes have been rendered irredeemable and declared legal tender, and
the central banks have been authorized to issue more notes than correspond to
their reserves of precious metal or cash holdings….the final step is taken when
the government is free to determine, more or less under the control of the
legislative power, the amount of fiat money in circulation….
This, briefly, has been the sad
history of money….
Where Ballvé has a condemnation of the system begins with
the monopoly that is granted (and can only be granted) by the government. This is the first step in the slippery slope –
and not the step of so-called fractional reserve banking.
Subsequently Ballvé comes to the subject of inflation and
deflation, and rightly defines these in terms of monetary issues and not price
issues. He describes an inflation occurring
when “the exploitation of gold mines results in an increase of the quantity of
money…and deflation occurs whenever…technical progress produces an abundance of
commodities [goods and services]….”
As long as inflation and deflation
occur in the normal course of events, their effects are produced slowly, their
extent is small in comparison with the amount of total international trade, and
the necessary adaptations can be made quite easily. But when they are abnormally produced – that is
to say, when they are produced by the intervention of the government – they have
mischievous consequences for they take from some in order to give to others.
Ballvé does not fear inflation or deflation in an
environment where money and credit are determined by market actors in a free
market. The fear comes with government
intervention, and the beginning and most important step in this intervention is
the grant of monopoly to a central bank.
Next Ballvé explores the possibility of the concept of “stable
money” and rightly concludes this is a pipe dream:
…the realization of this ideal is
impossible, because, like every other commodity, money is essentially unstable….People
talk of keeping the money in circulation proportional to the volume or
circulation of goods. But no one has
succeeded in finding the formula of this equilibrium or the means of applying
it.
There is no stability in money just as there is no stability
in the economic value of any good. All value
is subjective; being subjective, it is subject to constant, continuous, and
regular change. There is no formula to
properly stabilize the amount of money in circulation, just as there is no
formula in establishing an objective value to it. This is not subject to the quality of the
money – both gold and fiat are subjected to values determined subjectively in
the market.
There is no formula, and certainly not one to be found by a
handful of economists or legislators. It
is for this reason that even a gold standard must not include non-market
participants in any manner.
Ballvé makes one minor error – one that is made by many hard
money advocates. As it is the only
objection of significance I have found in this otherwise tremendous short work,
I do not hold it against him. He suggests
that the business of money and credit should be returned to the market,
including the return of all gold from the government depositories to private
individuals. So far so good….
…for gold is the only really sound
money with intrinsic value.
Ballvé has spent this chapter making the case for a market
in money and banking. In this short
statement, he seems to somewhat contradict his work, on two points:
1)
The only sound money (at least as close as
humans will come to inventing) is money derived by the market. It is money that withstands the pressures of
supply and demand and of contract and use.
2)
Nothing has intrinsic value. All value is subjective.
Other than this indiscretion, I find Ballvé’s work in this
chapter to be quite sound. Once again, in
a dozen pages, Ballvé sheds wonderful light on a subject confusing to many –
and in this case a subjective confusing to many advocates of Austrian
economics.
