no third solution

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The Fractional Reserve Banking “Contract”

May 13th, 2009

One of the arguments I’ve seen leveled in favor of fractional reserve banking in recent weeks, goes something like this:

Any law against fractional reserve banking denies otherwise free men their right to contract with one another.

On a purely technical point, there need not be any specific “law” against the practice in order to nullify the practice. Per common-law tradition, the only essential question is whether courts would tolerate or maintain contracts of this sort.

So, there need not be any grievance between depositor and his banking institution, for fraud or theft to occur as a result of fractional reserve banking:in fact, they may both be completely satisfied with the outcome of their arrangement at any point in time.  However, there remains the possibility that a third party has been injured by their agreement.

Though two men may form a compact to injure or defraud a third, no enforceable contract exists among them, which is to say that neither party may be contractually obliged to specific performance based on the existence of such a “contract”. Furthermore, even the existence of a valid contract (i.e., one with a legal purpose), shall not be construed in such a manner as to preclude a third party, unintentionally and accidentally injured during the fulfillment of the contractual obligations, from pursuing remedy from those who injured him.

If we can establish that fractional reserve banking does amount to fraud or theft, or that it causes harm (negative externalities) to others, we can safely assume that a free court would refuse to honor or enforce such “contracts.”

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no third solution

Blogging about liberty, anarchy, economics and politics