no third solution

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Category Archives: Legalese

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.”

Yes, Virginia, You Really Are Transmitting Data

May 6th, 2009

cNet reports that a new P2P bill would regulate web browsers and FTP clients, by forcing them to obtain “informed consent” every time a user transmits or attempts to transmit data. Is this the slippery-slope to regulating/destroying teh interwebs?   I think this is how it begins.

The proposed legislation essentially criminalizes software applications that work (defined as: doing what the user requests of it) unless said application obtains informed consent.

Imagine a pop-up every time you upload a picture to facebook, or a video to youtube, or send a set of vacation photos via gmail: Are you sure you want to transmit these files? This is not a feature, it’s a bug.  And this bill would force developers to insert this bug into just about every application you regularly use.

According to the bill, P2P applications are defined thusly:

software that lets files be marked for transfer, transferred, and received. (The exact wording: ‘to designate files available for transmission to another computer; to transmit files directly to another computer; and to request the transmission of files from another computer.’)

…Web browsers could also be regulated and subject to Federal Trade Commission enforcement action unless “informed consent” is obtained each time the desktop icon is double-clicked.

Or for more emphasis, “[e]very copy of Windows, GNU/Linux, and Mac OS X sold in recent memory” because they include “a command-line FTP client fitting that definition,” and every web browser, which allows users to upload files to teh interwebs.

And your iPhone probably isn’t exempt, either.

Setting aside malware which by definition does things without the user’s consent, nobody accidentally uses P2P software. Nobody accidentally uses a command-line FTP client, and nobody accidentally posts pictures or distributes files among their friends or an online network. The very act of using the software/application constitutes, in my opinion, a sufficient level of consent. To think that every time we ask to transmit data through the series of tubes, we need to be reminded that in-fact we are attempting to transmit data through the series of tubes, is the absolute zenith of paternalistic ridiculousity.

I am reasonably certain that this bill/law, by itself, is pretty much pointless. For starters, not everyone is as retarded as our Legislators would have us believe. This piece of legislation assumes that knowledgeable people using open-source browsers and applications won’t be able to override* such craptastic “features.”

They will. And they’ll distribute these rogue software patches to everyone who grows tired of clicking “OK” whenever they try to upload a picture.

Unfortunately, this fact doesn’t assuage my fears that this law is merely a minor annoyance which can ultimately be overridden.  It’s more like the tip of the proverbial iceberg, it’s the backdoor breach of what’s largely an unregulated arena that works pretty damn well, nearly all of the time.  It is the first step towards wholesale regulation of software applications and teh interwebs, which provides the necessary smokescreen for suppression of free speech.

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* I taught myself VBA for Windows with nothing but Google and a handful of scripts that someone else had created. I could probably do the same with an open-source web browser or FTP client. I just haven’t needed to. If this bill becomes law, I will figure out how to disable it, or I’ll just bootstrap off someone else who figured it out before I did.


Free Market Banking: A Reply

April 29th, 2009

Shortly after I published A Belated Reply on Fractional Reserve Banking, Jeff Molby inquired of me via email. I sent him a short response with the intent of responding more completely, here. There were a number of good comments/questions raised by other readers, and I do intend to respond to them, in turn. These things take time, however, so for now, you’ll have to content yourself with my response to Jeff.

Jeff writes:

I don’t support the status quo, but I wouldn’t support a society where 100% reserves are required by law, either. The reserve ratio should be negotiable between any individual and his prospective bank.

For instance, I should be free to contract with a hypothetical bank for an account with the following characteristics:
– I can withdraw my funds at any time
– The bank may loan up to 10% of my funds in any way it sees fit (or maybe it’s restricted in some mutually agreed upon way)
– I am responsible for any losses incurred on that 10%
– I am not charged any sort of warehouse fee

So basically, I would be accepting a certain amount of risk in lieu of warehouse fee and the bank is trying to turn a profit by using the 10% in an efficient way.

This may or may not be a standard position… I just never hear anyone talk about it.

I think this position is more common than you think, in fact it’s similar to the model of banking that most people (who are not bankers, financiers, or economists) believe that we have. And there’s absolutely nothing wrong with this model. However, there’s a huge difference between loan-brokering (which is what you’re describing) and fractional reserve banking. The problem is that the status quo is essentially licensed theft, and to the untrained eye it looks and sounds very much like the sort of thing you’re describing. It’s not.

Insisting on the ability to withdraw your funds at any time means that the bank would be in breach if they could not satisfy your withdrawal demand. The fact of the matter is that once you agree to permit the bank discretionary control over how that 10% of your money is allocated, it’s impossible for the bank to guarantee, or for you to insist, that you may withdraw your funds “at any time”. Any contract or agreement of this sort would be contradictory in nature: the second clause permits the violation of the first clause.

If you mark 10% of your deposits as “loans” and accept that they may be in default, then you are bearing the burden of risk and your investments may rise (or fall!) in value. Although in practice you may be able to withdraw the entirety of your balance at any time, this is not guaranteed, nor can it be. The only enforceable claim you would have is if the bank failed to honor your demand for the 90% of your money that they agreed not to loan.

If you really just want to loan money, why can’t you? For starters, as a central bank the Federal Reserve manipulates the money supply and the interest rates. Members of this cabal (for all intents and purposes, these members consist of all banks) are able to borrow money into existence, and lend it at interest. This privilege puts the individual lender at a severe disadvantage, it also hamstrings people who don’t make any loans or carry any debt (by decimating their savings)#:

Wage earners (most of us) are principally the last people to receive this newly created money, and they receive it only after enough time has passed and the primary and noticeable effects of inflation have rippled through the economy. If you wonder why prices rise, it’s because somewhere, someone else got access to a boat-load of newly minted greenbacks which nobody else knew existed (because in fact they did not exist) and used them to place competing bids on the purchases of real resources. — Fiat Credit Is Not a Loan (24 July, 2008)

Even still, until recently, individual lenders were able to find borrowers. But then the SEC banned interpersonal loans on sites like prosper.com which matched individual borrowers and lenders.  (The SEC has since relaxed its ham-fisted ban on Prosper lending.)

Because of the auction-like nature of these loans, even with a modest sum like $500 or $1000, a lender could distribute his investments across multiple borrowers, mitigating default risk. In a truly free market, you wouldn’t need a bank to loan your money, you could do it yourself, and pay the warehousing fees for the rest of your money with your loan proceeds.

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Note: In another recent comment, the question of whether one has a “right” to purchasing power was raised. I do not intend to answer that question presently, although if it were answered in the affirmative, there could be no conceivable justification for fractional reserve banking.

no third solution

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