=> Has Fractional-Reserve Banking Really Passed the Market Test? (By Guido Hulsmann)

=> http://www.independent.org/pdf/tir/tir_07_3_hulsmann.pdf

Switch the ideas around to a more ‘regular’ commodity, such as grain, and a legally enforced 100% reserve makes perfect sense, especially in the Hoppeian Austro-anarchist world in which I would like to try living.

For example, if I am a farmer and I bank 1,000 tons of grain with you, the Grain Silo Banking Company (GSBC), then although dried grain of a certain quality is fungible, and I wouldn’t necessarily expect to receive the exact same grains that I harvested and then placed into your silo storage, I would expect to receive 1,000 tons of grain, at the same quality to that which I placed into storage, at any time of my choosing. I would also expect that all farmers using the Grain Silo Banking Company’s facilities would also be able to retrieve all of their allotted stored grain too, without worrying about being able to get mine out afterwards.

Yes, I would be expecting a charge for the storage of this grain (say, 1/1000th of the grain held on account, per month), but I would call it fraud if I turned up one day to claim my grain (less storage charges) and was unable to get it because GSBC had lent it out, for interest paid in grain, in the mistaken hope in this case that other future deposits by other farmers would then cover them if I turned up to claim what was rightfully mine.

Why would creating a monetary system based on grain storage receipts, rather than gold storage receipts, suddenly magically allow the legal formation of fractional reserve grain banking?

This 100% reserve principle works for all other such storable fungible commodities, including coal, oil, copper, zinc, etc. And although this is a much less fungible example, imagine if you put some of your furniture into one of those ‘Big Yellow Storage’ warehouses. If you went to pick it up one day and found that they had rented it out to an office company for a year, and you couldn’t get it back until the year was up, would you really think that was Ok?

Why does the principle of contract law have to stop working, just because a banked and stored commodity is ingots of gold or silver, rather than ingots of copper or zinc? Or your furniture?

Yes, the enforcement of this contract law becomes the problem in an Austro-anarchist society, but the 100% reserve concept is perfectly sound, given that you can enforce the contracts. Bruce Benson’s work on anarchist law perhaps covers the enforcement of such contracts best, but that is a different matter, perfectly solvable with an extension of the international mercantile law systems of the medieval period, which crossed international barriers with little formal physical enforcement, with ease.

It is fractional reserve banking that reeks of statism. Because it was only when state judges stopped enforcing contract law on banks, in return for the banks then lending states fractional reserve monies (from thin air), that the problem started, so states could fight their stupid wars and then charge the rest of us for the privilege, in taxes paid back to their friends in the newly-privileged banks, to clear these loans. See De Soto’s ‘Money, Bank Credit, and Economic Cycles’, for much more on that.

It is also important that we anarchists not give the minarchists a sense of superiority on this topic of 100% reserve banking, because it is minarchism which is riddled with flaws and which keeps wanting to dance with the devil, despite the obvious dangers, not anarchism.

Fractional reserve banking should be given the name it really deserves: State-enforced Ponzi scheme banking.

Thanks so much for your well-considered post.

After reading it, and the banter between yourself and respondents, this financial illiterate still has one particular question.

While I agree that 100%RB is the only way to ensure that no inflation occurs, I’m still curious as to how “consideration” is given to lenders. Like I stated above, my ignorance may display itself in my question, but:

If a bank loans money in a 100%RB system at interest, where do the funds come from to cover the interest owed it? Likewise, when a depositor places funds into a bank’s custody, expecting regular dividends, where do those funds come from?

Sorry if these are dumb questions.

Thank you for your response.

If you think about your accounts, one of the ways you can meet the current asset/current liability obligation is that you have committed credit facilities. In other words, someone is promising to lend you money.

While this may be standard accounting procedures, we can imagine an alternative where you should report that you habitually borrow money to cover part of the bills. Perhaps there is no such thing as lines of credit. The whole idea that a bank would promise to make you loans didn’t exist. You just got loans when needed. Why does that make your business unsound?

When you say that the purpose of these accounting rules is to make sure you can pay your bills, the assumption appears to be that you will actually pay these bills. What if your suppliers habitually extend most of their bills, and collect on just part of them. Shouldn’t your accounting requirement be aimed at having the money needed to pay the bills that you need to pay?

Another short term asset you could have is marketable securities. My accounting colleague claims that if you say you will sell them within a year they count as a current asset. If you say you plan to hold them more than a year, they aren’t. But you can just make an accounting change to move them from one category to another.

Well, a solvent bank has assets greater than liabilities. It can move loans to “will sell in the year” from “investments.” And then they are all current assets. And what difference would that make?

Thinking of banks as money storehouses leads to nothing but confusion.