Thursday, March 18, 2010

Free Banking, the Balance Sheet and Contract Law Approach

Toby Baxendale, of the Cobden Centre, has written a thorough piece on free banking versus 100% reserve banking, which is well worth a read.

I certainly hope he allows this currently unmoderated comment of mine through, in reply to one commenter saying that 100% reserve banking reeked of statism. You know me. Having seen that one, I couldn't let it lie:
Jack Maturin Your comment is awaiting moderation.

Tomas, there is nothing wrong with a 100% reserve banking system in a totally anarchist society, and it requires no statism, just contract law. I think it is the concept of ‘money’ that clouds the issue, because this concept has been so infected by the state over the last five hundred years. But under anarchy, money will simply become another commodity, just like all other commodities.

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.


Paul said...

Strange coincidence, we are discussing the same topic today in Mises Circle Tallinn.

Guido Hülsmann has written many good pieces on the topic. Here is one that might not be that well known but which is just excellent:

Jack Maturin said...

Cheers Paul