[ExI] Free banking and fractional reserve banking (Re: Serfdom and libertarian critiques)

J. Stanton js_exi at gnolls.org
Fri Feb 25 07:29:36 UTC 2011

[I hope that, since this discussion is more about banking at this point, 
I can still respond to these messages even though the libertarian 
quarantine has been re-established.]

F. C. Moulton wrote:
> I am somewhat baffled by your comments because your comments ignore
> reality.  Libertarians have long complained about government privileged
> banking.  And obviously all anarchists by definition are opposed to
> government granted privilege in commerce or any other area.  Plus
> economists discuss free banking and it is easy to find.  Since I have
> been providing so many text links here are some video links:
> http://www.youtube.com/watch?v=5P7W1G1hbiQ
> http://www.youtube.com/watch?v=0PyS2NtW3xA

This is a common point of confusion.  "Free banking" still allows banks 
the privilege of creating money by issuing debt ("fractional reserve 
banking"), a fraudulent practice that any of us would go to jail for, 
and which is a special power granted only to "banks" by governments.

Example: If you give me $100 and I lend $90 to Spike, I have $10.  If 
you ask for your money back, I have to tell you "I don't have it."

If you give "Bank of J. Stanton" $100 and it lends $90 to Spike, it has 
$10...but it tells you that you have $100, and that you can withdraw it 
at any time.  In other words, your money is immediately replaced by an 
IOU for the repayment of BoJS' loan to Spike.

In practice, the bank packages and sells Spike's loan...so right now, in 
our current system, *** all of your money in a "checking account" is 
actually in a hedge fund making 30:1 leveraged investments in 
mortgage-backed securities. ***

And, in our current system, you are forced by "legal tender" laws to 
accept this share in a highly-leveraged hedge fund as if it were real money!

Yes, you can withdraw "your" money, but what you're really getting is 
other depositors' $10 (the "reserve" in fractional-reserve).  Which 
works so long as not too many other people try the same thing -- about 
6%, at current reserve and capital ratios.  Any more, and the fraud 
collapses ("bankruptcy").

(This is why the Fed holds over $2 trillion of worthless bank debt: the 
banks all know they are insolvent, so they've transferred their bad debt 
to the US taxpayers through the Fed.  It's the biggest swindle in history.)

Think about it for a moment...if I told you or anyone here "I have a 
great scheme by which we can all make lots of money, but which collapses 
if more than 6% of its participants try to take money out," you'd 
rightfully dismiss it as a fraud.  *Yet this is the foundation of the 
entire world banking system!*

All that "free banking" does is deregulate the oligopoly on fraud to 
some degree.  It's still a fraudulent system with perverse incentives -- 
both money creation and money destruction are positive feedback loops, 
and the fastest path to economic growth involves going into debt as 
quickly as possible.  The only benefit to free banking is that these 
crashes happen more quickly because the debt is not backstopped by a 
central bank...which I agree is a good thing, but it's polishing deck 
rails on the Titanic.

Stefano Vaj wrote:
> On the other hands, it is absolute private property of wealth in the
> modern sense which is a relatively new concept. The feodal lords were
> not the *owner" of their land in the modern sense, they were rather
> enjoying a privilege which could be accorded and under some
> circumstances revoked, had a limited if any transferability, was
> supposed to be parcelled through further concessions to lower lords
> (vavasours, vassals of vavasours), etc.

True.  But we're not "owners" of our land in the modern sense, either: 
if we stop paying taxes or responding to random demands at random times, 
our privilege of occupation is revoked.  Then there is eminent domain. 
And all transfers have to recorded by the local governmental agency: you 
can't just "sell" land directly to someone else.


More information about the extropy-chat mailing list