Is Fractional Reserve Banking Ethical: Part III- Concluding Arguments Against Fractional Reserve Banking

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Part I. Click Here

Part II. Click Here

Fractional Reserve Banking is Fraud:

If fractional reserve banking does not represent a legitimate contractual transfer of property then it must be fraudulent. However, Selgin and White precede with their ethical justifications for this form of banking. Touching upon a previous criticism levied by Hans Hermann Hoppe regarding how in the process of creating money titles what was intended to be a transfer between two parties ends up introducing third-parties (p.28). Both of the free-banking proponents dismiss this claim on the fact that “… spillovers from the others’ actions to the value .. property is an inescapable free-market phenomenon…” (p. 29 [p. 92-93] ). When these “third-party” effects veer into devaluation of another individual’s property they cannot be so easily dismissed. In terms of the context of fractional reserve banking, the devaluation of property is not equivalent to an increase in the supply of a commodity through production or harvest. It is categorically different (p.29). The difference is that an introduction of a greater supply of a commodity through market processes does not harm anyone’s property. However, the introduction of more money titles without an increase in the money supply has a “diminution” effect on the value of all the money held in the bank (p.30). This is done at the expense of all those holding money. They are the individuals who suffer from the debasement of the purchasing power.

The Appeal to Popularity Does Not Justify the Practice:

We are all familiar with the appeal to popularity fallacy. Unfortunately, Selgin and White deploy this faulty argument in favor of fractional reserve banking. Maintaining the stance that would not be commonly used if it wasn’t beneficial (p.30). All because a system is commonly used doesn’t automatically make it ethical or beneficial (p.30). If one is to utilize Rothbardian arguments to justify the methods of banking institutions we must evaluate this within the lens of his theory of demonstrated preference.  Which is best defined as “…actual choice reveals, or demonstrates, … his preferences are deducible from what he has chosen in action” (p.2). Selgin and White attempt to adapt this concept to an ethical defense of fractional reserve banking. This always the case? What about instances where the government monopolizes services such as defense and surveillance services? Hoppe et al. make this distinction in their repudiation of Selgin and White’s attempt to apply to demonstrate presence theory to an ethical defense of fractional reserve banking. After all, institutions shielded from market competition by government forces do not reflect individual preferences. Rather is the byproduct of a “territorial monopoly” (p.31). The theory of demonstrated preference only truly applies in instances where no coercion by the state is present. All because most countries have standing armies does not mean that this is the preferred method of allocating defense services.

Beyond demonstrated preference requiring conditions free of the monopolistic forces of the state, it must also be demonstrated with the rightfully obtained property. This because the theory “… presupposes…” legitimate “… property rights…”. These preferences of how to uses, retain, depose, etc. can only be demonstrated with one’s property. Anything else does not have a positive contribution to the general welfare of society (p.31). When we acquire property  due to the fact we are the one sole owner we obtain total jurisdiction over this property (p.32). Enabling us to truly demonstrate our preference. For example, If I wish to purchase a propane tank and use it for target practice on my ranch in the middle of the Sonoran Desert, it is my right to do so. As I (in theory) exclusively own the land, the propane tank, and the gun due to the rightful transfer of the lands and objects through several purchases. Through using my rightfully procured property in such a manner displays my true preferred use of these items. The practice of creating money titles in a fractional reserve banking does not demonstrate people’s preference for this system. Due to the ambiguity of rightful ownership of the currency in the vault. Rather demonstrates the demand for counterfeit money. As these money claims that are treated as being equal to currency are not being made in proportion to the notes on hand (p.33). Selgin and White hold that despite these considerations, fractional reserve banking is still ethical. Instead, it’s the government that presents a problem in the banking sector (p.34). This argument underscores the fact that in most instances this variety of banking systems were set up and supported by governments (p.34). This is only solidified by the point that legal institutions such as the courts and legislators will act by benefiting this system of banking. Most government institutions count on fractional reserve money creation for income (p.35).