Following Dr. Block’s supposition that a person can commodify themselves and effectively sell or alienate themselves (p.6), we must address the issue of capital destruction. The economic costs go beyond losses in productivity but also have more subtle ramifications throughout the economy. The act of suicide destroys a person’s body; however, the intangible assets lost are arguably the most detrimental. Most notably, in the form of squandered human capital and social capital. While these forms of social capital are refutably mere constructs, they still seem to possess a priceless qualitative value. In the absence of the knowledge, credentials, and necessary social networks financial success is not possible.
Commodifying these abstract concepts applies them to John Locke’s postulations regarding wasting resources (p.12). But if the value of commodities is subjective, we have to evaluate Locke’s assumptions regarding frivolous resource consumption. Furthermore, if we accept this notion of wasteful consumption, we must apply it to other areas of resource allocation. For example, investing too in production can be considered a wasteful form of resource allocation. Under Locke’s theory, if extrapolated, we should bar entrepreneurs from making overinvestments in their firms. Not only would such a law be unenforceable, but it also suffers from the Hayekian Pretense of Knowledge. Neither the businessman nor the lawmaker has access to perfect information. How would the lawmaker even know if a business owner engaged in malinvestment until the downstream effects have come to full fruition, paralleling the flaws of proactive legal sanctions? Entrepreneurial decision-making is enveloped in uncertainty. To quote the great Frank H.Knight:
It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term “uncertainty” to cases of the non-quantitative type. It is this “true” uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition. (p.84)
To preemptively declare a form of capital use or manipulation as “…wasteful..” is fallacious. At best, we can attempt to use market signals as a guide for appropriately deploying capital. Whether an investment was prudent or foolish will only be known once the downstream consequences are evident. In this respect suicide is just a form of managing the “… social..” capital structure through the informal destruction (p.21) of such social assets. Allowing people to dispose of capital at their own free will allows for the unfettered restructuring  of productive activities utilizing human and social capital. Allowing the substitution or destruction of “..social..” inputs.
The Lockean conception of shelf-ownership does not work if we cannot alienate self-hood. In the context of involuntary slavery, our absolute right (p.10) to self-possession is relinquished through coercive force . The notion of natural rights almost always implies that the individual owns. For instance, the right of free speech codified under the First Amendment of the Constitution implies self-ownership. Individuals embroiled in political debate must utilize the very bodies they own and utilize scarce resources (p.2)to engage in the passionate exchange. There is one glaring flaw that most ethical theorists get dead wrong about natural rights. Our negative rights that are part-and-parcel with our personhood may be self-evident, but they are certainly not inalienable. The American Declaration of Independence echoes this sentiment and forever cements it in the public consciousness:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.
The claim that these rights are unalienable does not connote ownership of these rights in any meaningful sense. By the inseparable nature of self-ownership and natural rights, we do not truly have unfettered possession of ourselves. The ability to alienate something is that can only be the consequence of ownership. True ownership implies that an individual can transfer, maintain, sell, deface, lease, destroy, etc. the article in question as they see fit. One of the strongest arguments for this radical interpretation of ownership comes from economist and Libertarian theorist Walter Block. Dr. Block writing “..No law should be enacted prohibiting or even limiting in any way people’s rights to alienate those things they own. This is “full monte” alienability, or commodification…” (p. 6) . Block surmises that an unlimited condition of ownership naturally extends to the person, meaning that if an individual chooses to sell themselves into slavery this is legitimate. Unlike the trans-Atlantic slave trade, the individual being sold is consenting to the arrangement .
However, most, and moral theorists would suggest that natural rights, especially selfhood cannot be alienated or dispensed with. As our mind and body are typically inseparable; neither can be reallocated nor disposed of. This supposition suffers from an unfortunate fallacy because a person can voluntarily absolve their will and sentience. In the most extreme case, a person could give themselves a lobotomy effectively alienating their will and severing their mind from their corporal body (p.8) .
There are less extreme examples of people abstractly selling off natural rights in exchange for material gain. One only needs to look to employment contracts to see a ubiquitous example of this selective selling of rights. It is common for employers to include social media policies as a condition of employment. Effectively acting as a voluntarily acknowledged limit on free expression; a right codified under the First Amendment. Regardless of whether this restriction is a temporary sale of this right or permanent alienation it is a legitimate exchange. From the standpoint of Rothbardian contract law, this arrangement fulfills the criteria for an enforceable contract. Under this theory of contract law, the property must be exchanged for the contract to be binding, any other agreement is a mere promise (p.133-135). At the core of an employment contract or conditions of employment, the property is being exchanged. The employer is transferring compensation (monetary and additional benefits) to the employee. This exchange is contingent upon the employee following the company’s internal policies. Indirectly operating as a form of selling or “renting” natural rights in exchange for employment.
Selling property is merely one means of alienating property. Other more drastic measures can achieve this same outcome. The concept that an individual can condemn their property, mirroring the same privilege current held by various tiers of the U.S. government. The only difference is that when the state does it, they do so without the consent of the owner. Even when eminent domain is practiced within the parameters of the takings clause, however, the property owner generally does not have the right to refuse to surrender their property. Regardless of whether they are justly compensated for the relinquishment of their business, land, or home this arrangement is still inherently coercive. In stark contrast, if a property owner dedicates to transfer or otherwise condemn the land they own, this is legitimate. Effectively, suicide is an example of a person opting to condemn themselves. A person choosing to forever dispose of themselves permanently disables their ability to contribute to society; mimicking how governing institutions can decree that land or a build is no longer fit for occupation or commercial use. The state typically initiates such a directive in the context of habitation or use of the property would pose a “safety hazard”. However, a person contemplating “condemning” themselves does not need to fabricate such vague excuses. If they truly own their own body and mind, they do not have to provide any justification for performing such action. Unlike eminent domain, the individual can consent to the decision they have made.
Most people might argue that allowing others to commit suicide with no mandated intervention would squander human lives . Further supporting this statement by repeating tired platitudes about how it is a permanent solution to a temporary problem. No doubt, suicide does come with a wide array of societal costs. The individual can never be replaced nor can their human capital because no two people have the same experiences. If we set aside the externalities of the act, there’s a deeper conflict at play. There’s a long tradition of property owners having the right to destroy what they own. The right to destroy one’s property has its roots in the doctrines of Roman and English Common law (p.8). Moreover, there is a long-standing tradition that arguably supersedes the concerns of modern environmentalists or other public interest initiatives. The concern for wasting resources was even voiced by John Locke back in the seventeenth century:
The same law of nature, which does by this means give us property, does also bound that property. God has given us all things richly, 1 Tim. vi. 12. is the voice of reason confirmed by inspiration. But how far has he given it to us? To enjoy. As much as anyone can make use of to any advantage of life before it spoils, so much he may by his Tabour fix a property in whatever is beyond this, is more than his share, and belongs to others. Nothing was made by God for man to spoil or destroy. (p.12).
While Locke provides us with prudent advice regarding resource management, it is nevertheless, a suggestion. A just legal system would defend the property owners’ right to dispose of their property how they choose, even if it is considered wasteful. A legal system that has penalties or restrictions impeding the right to destroy one’s property, provides a perverted form of justice. Much like anything else a person owns, they should be able to “destroy” themselves. In a sense, we legally permit other more protracted forms of incremental suicide. For instance, currently, no laws are prohibiting the sale or consumption of sugar-saturated and chemical ladened soft drinks. Although cigarettes are highly taxed and regulated, we still live in a society where smoking is still legally tolerated. Both soda and cigarettes slowly kill the person ingesting either product; despite this fact, these products should remain legal. Following this same logic, if the person should be able to choose what they put into their body, they can choose to also ultimately dispose of their body.
. The account of Slavery in Locke’s Second Treatise of Government (1690).
. The idea of wasting human life can be applied in an economic sense. The decreasing fertility rates in the Western world present challenges to the labor force and the tax pool. Especially, after all the Baby-boomers die.
Here is a hypothetical situation that presents us with a challenging conundrum that would drive most legal scholars and moral philosophers mad. There is as a person in a vegetive state who is hooked up to a variety of life-sustaining medical equipment (feeding-tube, ventilator etc.). Let’s say that the individual is married, and their spouse has been their legal guardian since they have become clinically brain dead. Does the parents of the incapacitated person have a say over the end-of-life decision making for their child? Should this heavy burden be left to the spouse and rightful guardian? It should be noted that the moral analysis must be separated from the determination of legality. All because something is legal does not necessarily make it moral. For instance, abortion in the United States is sanctioned around quasi-arbitrary timeframes with little consideration for situational context or biological development of the fetus. The decree of legislative fiat does not automatically make a policy moral. There are many legal protections within American statutory law that prevent individuals from facing criminal penalty or ligation. If crimes against persons and property cannot be subjected to restorative justice then there is no point in calling a legal system just. In other words, we will be reviewing this situation from a philosophical standpoint, specifically from the perspective of individual property rights.
The above scenario is not quite so hypothetical but is a concise description of the Terri Schiavo case. However, one striking difference between the scenario presented above and the Schiavo case is that :
Terri Schiavo breathes on her own. She is not on a ventilator or respirator. Although she swallows, she is sustained through a gastric feeding tube. She is not in distress or imminent danger of death.(P.5).
Despite Schiavo’s lack of cognitive functionality for the most part she was able to “live” in the most basic sense of the term. It should also be note that prior to her cognitive impairment she made no will directing her “wishes” for medical treatment. Also including end-of-life decisions. Therefore, leaving the variable of individual consent obscured by Schiavo’s incapacitated state. There was a rift between Schiavo’s husband/ guardian wanted to remove her feeding tube while her parents staunchly disagreed with this decision. Ultimately, the courts sided with the husband and Terri ended up dying after having her feeding tube removed. This may have been the legally permitted course of events, but was it moral from the paradigm of individual property rights?
The economist and Libertarian Philosopher Walter Block provides a remedy to this quandary squarely from the standpoint of Lockean property rights. A grown adult who has lost their cognitive faculties is analogous to a child and exist in purgatorial grey area when it comes to the prospect of Lockean ownership (p.5).Block takes the Rothbardian approach to addressing a parents required commitment to child rearing, which in fact allows parents to relinquish this right (p. 6). Much like how Lockean homesteading does not preclude an economic agent from taking ownership of an abandoned patch of land, this analogy can be applied to raising children. If an adult within the community is willing to devout the resources to raising a child discarded in dumpster, this should count as a transfer of guardianship (p.7). Based upon the premise of Lockean homesteading the Supreme Court of Florida was morally wrong in assigning the right to end Terri Schiavo’s life to her husband. Through wanting to end her life with no prior record or request of her wanting such measures taken, he effectively relinquished his guardianship. Clearly he did not do so in the modern legal sense, but he did so within the context of Lockean property rights. If her parents were willing to assume guardianship of their daughter then the court’s decision is nothing more than perverse.
And if they are, then whoever is at first control of her must maintain her; if he refuses, her guardianship reverts to the second closest party, her parents. If they will not homestead her, then perhaps her siblings. If not them, then anyone who wishes to take up this burden. Based on the number of protests at the callous way she is being treated ( Block, 2011, p.7)
The moral argument for a right to suicide is firmly grounded in property rights. To many readers the very notion that suicide and ownership of tangible objects are interconnected is farfetched. Upon a superficial assessment of the premise, it is easy to jump to this conclusion. Once we get to the philosophical taproot of the concept of ownership the overlap between the two concepts becomes much more apparent. Fastened to the pillar of natural rights, the right of ownership is crucial in establishing all other rights. The ability to retain, transfer, and exclude others from one’s property lays down the framework for all other negative rights we cherish. For example, if a dinner guest offends us with an off-color joke at our house, we have the right to ask them to leave. The right of excludability. If the dinner guest is aware, we are offended by specific kinds of jokes, they fully consent to the conditions of the dinner party by opting to attend. Due to this variety of informal rule creation, there is no need to implement laws prohibiting offensive speech. Individual property owners can decide what types of jokes or language will be tolerated in their household.
The basis for ownership of tangible items goes back to an even deeper principle of self-ownership. If we do not own ourselves how can we possibly possess physical property? Either in the title or tangible form. The philosopher who bridges the gap between self-ownership and ownership of objects, locations, and intellectual property is no other than the great John Locke. At the most rudimentary level, we must own ourselves before we can possess any additional property. The extent to which this self-ownership is applicable is debatable. We can legally own ourselves. We have autonomy over (in most cases) our corporeal vessel that holds our inner organs. An individual can also exert control over their mind. Where does the right of an individual to own one’s self arise from? This merely the abstract pontification of an out-of-touch philosopher? Most who have read Locke would staunchly disagree with the prior inference. Locke developed a concise explanation linking self-ownership to an unwavering natural right.
In Locke’s Second Treatise of Government (1689)he further expounds upon the natural basis for self-ownership. Arguably laying down the nascent substrate for the ethical arguments against slavery later on in the 19th century. The right to self-ownership is the result of divine providence. In Locke’s view, God gives us life and we are born free. For those who have more of a secular view of the world, it could state we are born free by our humanity. There is no grand authority that we must oblige by involuntarily transferring self-possession to as a result of cohesion.
“…Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his person: this nobody has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. (p.11)..”
Locke establishes that no one person has the right to own another human being. The implications of the above quote go beyond the abstract conceptualization of self-ownership. Due to a person owning themselves they also possess the fruits of their labor. If you work and toil to harvest lobsters in the icy waters off the coast of Maine, whatever you catch is rightfully yours. Providing you are not capturing so many lobsters that you are preventing others from having a chance to obtain the seafood delicacy. Nor are you procuring so many they will go to waste (p.12-15). Through self-possession and possession of our labor and the results of our labor, the natural rights argument for property ownership is pithily conveyed.
John Locke was correct about all people being born free and having possession of overall commodities, lands, and intellectual property that they have rightfully obtained through their labor. Where he went astray was asserting that natural rights are inalienable. Regardless of whether we procure these rights from god or as a result of our personhood, you can alienate these rights. Whether or not it is ethically justifiable is completely contingent on the consent of the individual. We have a natural right to free speech for example. While at work we temporarily or indefinitely suspend (for the duration of our employment) our right to unfettered speech as a condition of employment. There is nothing illegitimate about this arrangement because it expresses a form of tacit consent. If you truly disagreed with the rules of the company you otherwise would not accept the job offer. Agreeing to conditions of employment can operate as a form of selling our natural rights. If we truly own ourselves and possess all of the natural rights we are guaranteed in the Constitution, why couldn’t we sell the title to our rights to other people? That is effectively what we do when after signing an employment agreement. Our natural rights cannot be transferred or relinquished unless we willingly agree to conditions or arrangements that nullify these rights.
One particularly controversial example of this concept was formulated by the Austrian economist and political theorist Walter Block. Dr. Block postulates that voluntary slavery is not incompatible with individual freedom. Such a position sounds antithetical to liberty, however, understanding the context is key. There is a difference between being forced at gunpoint into slavery and choosing to be a slave. Why would anyone choose to be a slave? They or a family member may owe an astronomical amount of money to a private individual and the only means of making restitution on their debts would be a lifetime of unpaid servitude. It highly unlikely that anyone in modern times would consent to such an arrangement. Being able to sell one’s self to another person demonstrates an unfettered view of self-ownership. The laws prohibiting voluntary slavery are essentially are equally as unjust as keeping involuntary slavery legal. We can’t say that we truly own ourselves if we cannot do as we please with our bodies. That includes opting to sell ourselves into slavery.
The question becomes how does the argument for voluntary slavery apply to suicide? Logically it is predicated on the very same principle of self-ownership. If you truly own yourself and no one else has possession of your body and mind, then you have a right to kill yourself. As jarring as this statement maybe it is nevertheless true. If we truly possess an object or an idea we can do as we please with it. We can sell the item or bit of intellectual property, or we can dispose of it. Nothing is stopping us from purchasing the latest iPhone at full retail price and then upon receiving the device, abruptly throwing it into a trashcan. While by the assessment of convention sensibilities such an action would irrational or foolish, no one has a right to prevent this behavior from occurring. Regardless of the perception of others, the notion of ownership prevents others from intervening. Some may criticize this example because it is comparing a replaceable item with the irreplaceable essence of human life. This critique is a fair one, however, that does not make this a false analogy. The operative condition is the concept of ownership not what the individual is choosing to dispose of. Regardless of the origin of where we obtain our natural rights from we do own ourselves. Much like anything else we own we have a right to dispose of ourselves. This is not making a moral judgment about the act of suicide in-of -itself. Nor is this a tacit endorsement of suicide. However, legality is no measure of morality. Nor is pressure to conform to societal norms. If we legalized heroin use and prostitution tomorrow, these activities would not necessarily be moral. But they would be legal. While these activities may be immoral, inferring an individual’s right to poison their body or engage in infidelity is also immoral. Immoral on a grander scale. When victimless crimes have codified sanctions, they are generally backed by the threat of incarnation, fines, or state violence.
The decision to commit suicide is a deeply personal decision that should not be felt in the hands of doctors, psychologists, and especially nor legislators. Attempts to intervene in suicide attempts are naturally transgressive against the individual’s property rights. If indeed, we truly possess self-ownership.
The debate over whether Fractional Reserve Banking is ethical to proceed over approximately a decade (the late 1980s/ early 1990s to the early 2000s). Resulting from subsequent papers repudiating the previous claims over the researchers on the other side of the issue. It should be noted that in these series of retaliatory papers that technical arguments were presented in tandem with ethical justifications for or against this practice. For the sake of brevity, I chose to focus on the ethical considerations of the topic. However, this does not exclude a potential technical comparison of Fractional Reserve Banking in the future.
To any reader who has never thoroughly examined nor given a second thought to Fractional Reserve Banking, I hope reading this series of essays was illuminating. Fractional Reserve Banking is arguably the most prevalent banking system globally. Yet, something that impacts our lives daily we never think to question its inner mechanics let alone whether it is ethical. The ethics of banking extend beyond whether the patrons are benefiting at the expense of someone else, either through easy access to loans or interest payment on savings. There are potential ramifications to the economy.
Distortions in the credit market are precisely the impetus for business cycle calamities such as the cataclysmic burst of the Housing Bubble in 2007. Providing loans backed up by fiduciary media is nothing more than a house of cards waiting to fall done. Artificially manipulating factors such as prices, interests, and money supply can only facilitate the misallocation of resources. Such indicators operate as unspoken signals to consumers and entrepreneurs. Due to this fact, these distortions create an illusory image of the loan market and naturally economic agents respond accordingly (p.108). A fact that both George Selgin and Lawrence White are too quick to refute and dismiss (p.102). This carries the implications of defrauding the economy as a whole versus being isolated to the bank’s customers. Even if you are the type to limit all your transactions to precious metals or cryptocurrency, it is worthwhile to read up on this topic.
Summary of Compelling Arguments From the Austrian School:
It is difficult to say whether the Free-Bankers or the Austrians are on the right side of the debate. Both camps provided some truly convincing arguments. The Austrian opposition notes how ownership can only legitimately be taken on by one person and Fractional Reserve Bank obfuscates this immutable law of property ownership. From a contractual standpoint, that the agreements between banks and clients in such an argument are illegitimate. Since the terms are not only unclear to the typical layman but are a categorical misrepresentation. Presenting fiduciary media as actual money. The disingenuous nature of this faulty contract is only compounded by the fact that these claims for money are based upon the banknotes that are not back by currency or specie. Attempting to redeem them for actual currency is analogous to using a deed for a boat and attempt to claim ownership of a house. Also that it is a false analogy to argue that any devaluation of present money caused by the issue of fiduciary media is no different than an increase in the supply of a good due to protection or harvesting.
This is because the increase in the supply of lumber from harvesting more oak trees is derived from legitimate market processes and in-turn does not seek to directly devalue anyone else’s property. Also, that in no way can Fractional Reserve Banking represent the Demonstrated preference of bank clients. Demonstrated preference can only be expressed with one’s property. Fractional Reserve Banking by its very nature disrupts this relationship.
Summary of Compelling Free-Banking Arguments:
The Free-Bankers also bring up some compelling moral defenses in favor of Fractional Reserve Banking. They are even bold enough to directly claim the practice is not fraudulent. Through a banking client electing to accept the terms of service regardless of their understanding, the contract is still valid. It would be one thing if these banks purported to practice 100 percent reserve banking, but function as a Fractional Reserve institution. These contracts are formulated between consenting adults, it would be antithetical to the principle of individual freedom to prohibit such arrangements. The real trouble comes from government interference. One only needs to look at the large array of protections awarded to backs through the FDCI to see the true culprit in shielding unsavory banking practices from insolvency or litigation. Also, the ignorance or the naiveté of the consumer is not a reasonable justification for banning a product or service. Even though the risk of a bank run is present, it is a relatively rare occurrence from a historical standpoint. If faced with a potential bank run the bank can issue an option clause suspending redemption, solving the issue through valid contractual recourse. Speaking of redeeming bank deposits. A customer assumes the risk of not being able to redeem money when they agree to open an FRB account. They assume the risk. In turn, for the opportunity cost of having their liquid money held and the potential risk of a bank run/ insolvency, they receive an interest payment. Overall, patrons must prefer Fractional Reserve systems to 100 percent reserve banking. There have never been any governmental decrees in modern history that all banking must be done via a Fractional Reserve System. Despite its flaws, ultimately, the people prefer being paid interest payments versus having to pay warehousing fees.
Can There Be a Compromise?
There are certain aspects of both arguments that appear to be flawed. The Free-Bankers are too lackadaisical when it comes to distortions in the credit structure enabled by Fractional Reserve Banking. The Austrians to some extent seem too rigid in their interpretation of property ownership. Under many of their arguments likening the practice to a Ponzi scheme. Yet, to be conceptually consistent would not these same economists also take issue with multi-level-marketing? Then again it could also be counter-argued that MLM schemes and Fractional Reserve Banking while present similar confusions, property rights have much greater degree clarity in MLM arraignments.
Back in 2000, the economist Jorg Guido Hulsmann wrote an article in the Independent Reviewrefuting the Fractional Reserve practice of creating “money”. Hulsmann (see page 108) much like his anarcho-capitalist counterparts Hoppe and Block are opposed to government intervention. If FRB is morally and technically flawed how can we address the issue of it short-comings without introducing state involvement? In this twenty-year-old article, Hulsmann presents a summary of points previously made by Hoppe and Block that would alleviate some of the issues relating to the categorical confusion. It should be noted that Hulsmann in that these suggestions for informal rules and norms of banking presume no state involvement in banking. Also, the author details the intimate relationship between the FRB and the government. Going so far as to refer to it as a “handmaiden” of government (p.108). Making it easy to infer that Hulsmann believes that the intertangled marriage between Fractional Reserve Banking and government is an unbreakable bond. However, let’s take these suggested conditions as theoretical and contingent upon a banking system free of regulation. See his suggestions below:
“…Fractional reserve banks would have to use a different language than they commonly use because words such as “deposit” are deceptive. They would have to make it clear that money “deposited” with them is, in fact, a credit of unspecified duration. And the “banknotes” they issue would have to be presented not as money titles but as some sort of very liquid IOUs..”
“..On the “FR notes,” one would have to find a promissory note of the following type:
The FR Bank promises the holder of this note to try to redeem it out of its gold reserves. Because FR notes are not 100 percent covered by gold presently in our bank, in case we cannot redeem, the following rules apply. . . . (p.108)”
It is quite clear at this point that followers of Austrian economics view Fractional Reserve Banking as nothing more than a Ponzi Scheme. However, proponents of the Free Banking School (arguably an outgrowth of the Austrian School) believe that this practice is legitimate providing there isn’t any government interference in banking. Even the uninitiated observer will admit that this contingency is a highly unrealistic one. In the modern era, banking continues to be a heavily regulated industry. Free Bankers may have a relatively cogent ethical argument from a theoretical standpoint. After all, it is the responsibility of a mentally competent adult to be aware of the terms of service for any product or service they choose to receive. Ignoring the fine is not an exculpatory factor. Either from a legal standpoint or from an ethical perspective. Also, to be conceptually consistent one should scrutinize multi-level marketing schemes. Such a business model mirrors similarities to Fractional Reserve Banking. Hence why opponents liken it to a Ponzi scheme or pyramid scam.
Argument #1: It Isn’t Fraud.
From the Free Banking perspective, Fractional Reserve Banking is not a fraud. If the banking establishment makes it clear that the services provided constitute Fractional Reserve Banking, then the arrangement is legitimate. This is because the terms of the contract were not violated (p. 87). It would be problematic to present your services as 100 percent reserve banking if it encompasses the practices of the Fractional Reserve System. Fraud would entail a misrepresentation of the bank’s services.
Taking any measures to prohibit this system of banking is antithetical to the principle of individual freedom. Any such interference would be obstructing an existing contract between consenting parties. Doing nothing more than disturbing the economic liberty of freedom of contract, which is a pillar of private property rights (p. 87). Individuals who oppose the practice find the freedom of contract argument to be farfetched as few patrons have a firm comprehension of what Fractional Reserve banking entails (p. 88). The naivete of the consumer does not sully the legitimacy of the arrangement. Even Murray Rothbard himself has stated that historically banks have rarely retained a 100 percent reserve system (p.88). Why? Most likely because the banks clients preferred a Fractional Reserve system. If customers prefer an interest payment on their savings versus a maintenance fee for warehousing, so be it (p.88). The market for banking services has responded accordingly.
Circling back to the issue of misrepresentation of services, even the hardline naysayers believe that such a banking system could be admissible under certain conditions. Most notably if there was the further elucidation of the specific details of fractional reserve services. A long-standing concern of economists such as Hans Hermann Hoppe and Walter Block being that such ambiguity makes the practice fraudulent. Creates categorical confusions between money and fiduciary media (p.20-28). Professor Block asserts that the redemption requirements need to be clarified to set aside the concerns of fraud (p. 89). Whereas Block’s counterpart Hoppe stresses that banking institutions should present a warning regarding the suspension of redemption. He analogizes this precautionary courtesy to an option clause. Unfortunately, this concern does not comport with the facts of history. As is evident by the Scottish period of Free-Banking in which specie payment was suspended for decades (p. 89-90).
Another argument that grapples with the question of whether FRB is fraudulent pertains to the ability of the banks to fulfill redemption obligations. Keeping low percentages of reserves on hand turns money redemption into a gamble. However, this concern is inconsequential. Historically even in the absence of government intervention few banks have failed to fulfill any redemption obligations to patrons (p.90). For one, solvent banks are not prone to bank runs. Even in the event, a solvent bank runs out of currency, they can issue an option clause to temporarily suspending redemption. Resolving the issue through contractual channels (p. 91).
Argument #2- The Concerns Over Third-Party Effects Are Not Substantial
The most salient third-party effect or “spill-over effect” confronting the practice of Fractional Reserve Banking is a decreased likelihood of successful redemption. Obviously, in a Fractional Reserve Banking system, the more money that is lent out the fewer reserves the bank will have on-hand. Resulting in adverse consequences for the individual demanding to withdraw money from their account. It should be noted that the depositor agrees to this argument upon opening a bank account. Therefore, by signing on the dotted line of the terms and services of the bank, they choose to assume the risk (p. 93). Despite the risks, bank patrons continue to bank with these institutions. Alone based upon the Rothbardian theory of Demonstrated Preference the individual bankers must benefit from this arrangement. After weighing the benefits concerning the costs (p.93).
The spill-over effects of Fractional Reserve Banking are not solely confined to banking transactions. The practice has also been claimed to create other distortions throughout the economy. Through how loans are funded it compromises some say the credit structure is compromised. It should be noted that the risks are somewhat minimal. If anything it aides the economy by providing a larger stock of capital (p.94). The issue with this criticism is that much of the instability in the economy comes from the intervention of central banks and governments and not Fractional Reserve Banking. This form of banking is not prone to instability or “cylindrical over-expansion”(p.94). These claims underestimate the fact that the amount of “nominal money” issued offsets the “.. changes in the velocity of money..”. Fractional Reserve banking works to alleviate the disequilibrium and “ business cycle consequences”. Hoppe and the company also assert that any injection of fiduciary media will ultimately result in a business cycle. However, if the increase in fiduciary media is matched by demand a disequilibrium will not arise (p.101-103).
Argument #3: The Popularity of Fractional Reserve Banking.
The popularity of Fractional Reserve Banking is another factor to contend with. Banking customers have demonstrated their preference for FRB. Historically, few banks have remained a 100 percent reserve system. However, customers continued to do business with these institutions (p.95). Contributing to this popularity has been the incentive of banks paying interest on deposits versus requiring a warehousing fee (p.95). Banking patrons also held faith that their bank had sufficient funds to fulfill withdrawal demands. Bank runs were generally triggered by other factors signally insolvency to bank clients. Countries such as the United States with greater propensities towards bank insolvency tend to have many protective laws shielding the banks from market pressures (p.95-96). It should also be noted that back in the 1800s when banking legislation was being discussed in the press the banking system was openly described as a fractional reserve system (p.96). Not only fully informing the average constituent of the details of the Fractional Reserve system, even with this knowledge doing little to dampen its prevalence (p.96).
The use of Fractional Reserve Banking has never been compulsory. There has never been any laws or penalties compelling banking in the United States to levitate towards this specific banking system (p.97). Patrons voluntarily assume the risk of engaging in this variety of banking for the trade-off of being rewarded with an interest payment (p.97). The argument that clients are unwittingly tricked into patronizing an illusory form of banking is dismantled by the fact that banks compete for business. Nothing is stopping an enterprising individual from persuasively selling 100 percent reserve services (p.97).
The key arguments against fractional reserve banking being a moral system came from a 1998 paper co-authored by Austrian economists Hans Hermann Hoppe, Jorg Guido Hulsmann, and Walter Block. The white paper entitled Against Fiduciary Mediawas a response to a previous paper written by George Selgin and Lawrence H. White. Hoppe at al. crafted a repudiation against Selgin and White’s 1996 paper In Defense of Fiduciary Media or, We are Not Devo(lutionists), We are Misesians.In which both scholars provide a normative and positive defense of fractional reserve banking. Even utilizing Murray Rothbard’s Title-transfer Theory of Contract to defend the practice. However, this application of the Rothbardian contract theory did not sit well with Hoppe and the company. All being devoted and unwavering followers of Rothbard believed that Selgin and White’s interpretation of Title-Transfer Theory of Contract to be incorrect. Making their justification of fractional reserve banking on grounds of contract theory to be inherently flawed. It is worth noting that Hoppe was a direct protégé of Murray Rothbard and even owed his career and position teaching at the University of Nevada, Las Vegas to the late Austrian economist.
Rothbard’s Title-Transfer Theory of Contract:
Before claims that Selgin and White did not faithfully adhere to or misinterpreted Title-Transfer theory, it is important to thoroughly explain this concept. A reader without a firm comprehension of this idea cannot adequately determine if free-banking proponents of fractional reserve banking suffer from profound confusion. The proceeding section will provide a brief overview of this theory. Hereby providing the reader with the requisite background information to justly assess this debate.
Before diving into Rothbard’s theory, it is important to note his ideological disposition. Murray Rothbard was the modern father of an ideological subset of libertarianism known as anarcho-capitalism. Rothbard and his followers hold that there should not be limited government, but rather no government. All services and products can be produced by private industry with no necessity for government intervention. This even includes services that have been traditionally provided by the government. This includes defense/security services, law enforcement services, charity, resource management, infrastructure, private legal adjudication, and so on. Rothbardians even go so far as to assert that the government possesses a monopoly on such services. It is imperative to understand this aspect of Rothbard’s political economy and political philosophy. It illustrates the fundamental philosophical precepts that govern his theory of contract.
Rothbardian Contract Theory is expounded upon in his 1982 book The Ethics of Liberty. Rothbard derides that the concept that all contracts in a just society need to be enforced( P.133). He draws a sharp line of delineation between “promised” and “conditional” contingencies in matters of exchange. Per his logic, the utilization of legal channels to enforce a promise is wholly illegitimate. Constitutes the use of government force in a situation in which no property has been transferred. Making it equivalent to state enforcement of morality (p.133-134). The reason why the property needs to be involved for a contract to be valid pertains to the distinction between what is intrinsically alienable and inalienable to the individual. This has to do with the fact that a person cannot alienate their own will or relinquish control of their mind and body to someone else. Humans can quite easily dispense with tangible property, including money (p.135). Due to the fact enforcing a promise is a compulsion because it interferes with the free will of the individual. It is not technically a breach of contract. On the other hand, if the agreement included a transfer of property for non-compliance then it would be another story.
In instances of conditional contracts and agreements, noncompliance is equal to a form of theft. One salient example Rothbard provides is the circumstances of service providers receiving advanced payment but never providing the service (p.137). For example, if I were to offer to paint your house and I received an advanced payment of $300.00 and never show up your house that is theft. One contractual contingency that can shift a promise to a conditional agreement would be a performance bond clause within the agreement. For Rothbard’s example, if a movie theater has a meet and greet event with a famous actor, they can put into the agreement a clause where the actor agrees to pay the theater a sum of money for abdicating this obligation (p.137). Since a property can be transferred and not the will of the actor this is an ethically binding agreement. However, failing to fulfill a property-related obligation is not always necessarily deemed as implicit theft. In instances where a creditor provides immunity to a debtor who cannot pay their bill this is legitimate (P.144). Why? The creditor reserves the right to forgive debts due to the fact they are the ones who transferred their property under the condition of repayment. Please note that this scenario details circumstances in which the credit lent out their funds.
It should be noted that a Rothbardian conception of contractual property rights does not preclude someone from selling off a portion of their property. For example, if I own 100 acres of land in Montana. It is well within my rights to transfer you 5 acres for $20,000.00. Concurrently, retaining my claim on the residual 95 acres of land. This does not mean that mean I in any way still own those 5 acres. Through the sale of this land, I have effectively transferred ownership to you. In turn, I have relinquished by entitlement to the lands sold.
“Another important point: in our title-transfer model, a person should be able to sell not only the full title of ownership to the property but also part of that property, retaining the rest for himself or others to whom he grants or sells that part of the title. Titles, as we have seen above, common-law copyright is justified as the author or publisher selling all rights to his property except the right to resell it.”
How The Free-Banking Argument For Fractional Reserve Banking Violates Contract Theory:
Selgin and White claiming that fractional reserve banking is consistent with Title-Transfer Theory suffer from some blind spots. Blind spots that are fully magnified by Hoppe et al. One of the fundamental chinks in the armor of the Free-Banking argument is that fractional reserve banking inherently violates Title-Transfer Theory. It assumes that two people can own the same piece of property simultaneously (p.21). By the very nature of how fractional reserve banking engages in lending, it creates ambiguity regarding ownership. Through issuing more promissory notes both the bank and the customer assume ownership of the same banknote, which is fraudulent by nature (p.22). Creating more claims to money against the present supply of money will not create more money (p.22). Rather, will only serve to redistribute the present supply of actual currency from client to client without increasing the amount of money in the vaults (p.22). Effectively creating fiduciary media (money-substitutes issued by a bank that is not backed by gold or paper money) out of thin air without transferring assets or liabilities (p.22). As detailed in Rothbard’s theory, we can sell off a portion of our property. However, we relinquish our own once we transfer it to the party purchasing it.
This illusory arrangement also conflates property with property titles (p.23). Treating and categorizing banknotes( fiduciary media, money claims) as money (physical property). This only enables this fallacy to continue. Keeping in tune with the Austrian tradition the Regression Theorem states that all money had a prior use value (p.34-36). For instance, tobacco and nails at various times in human history have been used as money. Meaning that these banknotes cannot be money in the actual sense, but a claim or title to money. Through this categorical fallacy, the banks can divorce titles from ownership resulting in the redistributive practices of fractional reserve lending (p.23). Even going so far as to promising future entitlement to goods against present goods that may or may not be fulfilled. It would be honest to label these claims to future goods or debt claims, but not a claim to money (p.24).
An inquisitive observer may question why it is dishonest or even outright fraud to categorize future claims to money as money titles or even as money? Hoppe et al. frame this from the standpoint of we cannot claim or transfer ownership from a title to a car for anything but a car and the same applies to money (p.25). If we were using more precise language what banks and customers have truly agreed to is debate claims versus money titles. Per the authors of Against Fiduciary Media Selgin and White adopted a hyper-subjective interpretation of contracts to side-step this discrepancy (p.26). The misrepresentation engaged in by practitioners of fractional reserve banking extends beyond labels of goods, but to actual quantities as well. By treating fiduciary media as money, it creates the false perception that clients own more than what they truly due on paper. The fabricated money quantities do not reflect the amounts present in the vaults of the bank (p.27). Free-banking proponents may believe that fractional reserve banking isn’t so much the problem, rather government intervention. As long as the withdrawal requests are fulfilled it cannot be tantamount to fraud. However, even without state interference, the transfer practices of fractional reserve banking blur the lines of definitive ownership (p.29). Making the system incompatible with upholding property rights or just contract enforcement.