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Thursday, October 20, 2011

Hey, I Just Withdrew Some Colorless Red Patches from the Bank

A rather bizarre argument against fractional reserve banking, which I ran into this morning yet again, runs as follows: If I make a contract to sell you a square circle, that contract cannot be enforced, because it is self-contradictory. (Is the contract really self-contradictory?) Well, fractional reserve banking is the same! The fact that people may voluntarily put their money in fractional reserve banks means no more for their legitimacy than does the fact that someone might have agreed to take delivery of a bunch a square circles.

Well, if this analogy worked, what it would prove is that fractional reserve banking can't possibly exist. Contracts for square circles are illegitimate because square circles are impossible. By analogy, contracting into a fractional reserve relationship must be illegitimate because fractional reserve bank notes cannot exist.

Oddly enough, these non-existent entities are also the cause of the business cycle!

4 comments:

  1. It's ironic, because they undermine their own argument for another reason.

    There was never a contract to serve as a bailment of a depositor's property. Money deposited in a bank becomes the bank's property. So when they say that you can't enforce a nonexistent contract, they are exactly right when they use it to refer to FRB.

    Ironically, the problem was calling it fractional reserve banking. It's more of depositor-capital-backed lending. Banks don't "lend from reserves". Those reserves are for bearing losses on defaulted loans.

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  2. If the "square circle" analogy were remotely balid, then a bank vcould never even provide a working fractional reserve (FR) account and banking institutions.

    Yet working FR account snd woking FR banks have existed since Roman times, and probably before that.

    Anyway, the whole anti-FR banking position is based on a gross, ignorant inability (of just unwillingness) to understand the difference between a mutuum and depositum (bailment).

    http://socialdemocracy21stcentury.blogspot.com/2011/09/if-fractional-reserve-banking-is.html

    http://socialdemocracy21stcentury.blogspot.com/2011/09/mutuum-contract-in-american-law.html

    http://socialdemocracy21stcentury.blogspot.com/2011/10/more-historical-evidence-on-mutuum.html

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  3. I like fractional reserve banking but your argument is flawed.

    The note *is* the contract.

    What you're saying is analogous to "the anti-frb people think notes to square circles can't exist" I do not think these people hold such a position.

    I'm not saying that fractional reserves are like square circles, just that your analogy is wrong.

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  4. Well, Avram, I don't think that's what the opponents of FRB are thinking, because their analogy has a contract *about* an impossible thing, but if they were, how would formulation help them? Obviously, the contract itself is not impossible to make, since it is made!

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