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The Problem with “Fraud”: Fraud, Threat, and Contract Breach as Types of Aggression

From the Mises Blog (July 17, 2006):

[See also:

The Problem with “Fraud”: Fraud, Threat, and Contract Breach as Types of Aggression

07/17/2006

Recently I pointed out something that has irked me for years: the misuse by libertarians of the term “coercion” as a synonym for aggression. Coercion is not necessarily aggression; and aggression does not necessarily employ coercion.

I have also noticed several times over the past few years that libertarians often use the term “fraud” imprecisely, with no definition—as if it’s some kind of obvious concept that needs no definition; and as if it’s obvious that is a type of coercion. Er, I mean, aggression. Rand, e.g., wrote: “The only proper purpose of a government is to protect man’s rights, which means: to protect him from physical violence… The only proper functions of a government are: the police, to protect you from criminals; the army, to protect you from foreign invaders; and the courts, to protect your property and contracts from breach or fraud by others, and to settle disputes by rational rules, according to objective law.”

So you have this linking of aggression, fraud, and breach of contract as the exhaustive ways that crime can be committed, with sort of the assumption that the latter two are variants of aggression. It is also assumed that the threat of aggression is a type of aggression. Sadowsky, e.g., defines rights this way: “When we say that one has the right to do certain things we mean this and only this, that it would be immoral for another, alone or in combination, to stop him from doing this by the use of physical force or the threat thereof.”

Breach of Contract

Now it was never immediately obvious to me why fraud, or threat, or contract breach, are species of, or imply, aggression. To my simple mind, perhaps, I needed to look further into each of these, to see just why. So let’s look at each in turn. First, in my view, a coherent understanding of contract shows how it basically transfers title to property; and crime occurs when property rights—including those allocated by contracts—are violated (see my A Theory of Contracts: Binding Promises, Title Transfer, and Inalienability). (A promise-based theory of contract would be harder to square with the standard theory of aggression, which is why, I believe, Rothbard views contract only as title transfer, not as enforceable promises.)

Threats

And I tried to show, in Punishment and Proportionality: The Estoppel Approach (pp. 68-69), why threats can be a form of aggression (see also this version of the Punishment article, p. 639, section “Why Assault and Threats Are Aggression”).

Fraud

The case of fraud is tricky too. I believe the failure to carefully define what fraud is, and to specify exactly when and why it is a type of aggression, leads to confusion. For example, some of my esteemed Austrian colleagues seem to think fractional reserve banking is “inherently fraudulent,” and therefore, not merely uneconomic, but also one that should be legally prohibited (I believe Hülsmann, Hoppe, Block hold this view: see, e.g. Hoppe, Hülsmann, and Block, Against Fiduciary Media; see also Rothbard, What Has Government Done To Our Money?; and George Reisman, Capitalism, pp. 514-, and 594-), as does Reisman—I don’t have the links at hand, if someone can post them I can update this). In my view, fractional reserve banking is economic nonsense, but not necessarily fraudulent. Likewise, it is sometimes said that plagiarism (23), or even just reprinting someone else’s writing, is a “type of fraud,” so that copyright law is justified. Others claim that establishing a corporation is “a fraud” and therefore corporations are not justified. Frank Van Dun, in Against Libertarian Legalism, criticized my “legalistic” theory of trademark (see my Against Intellectual Property, p. 43-44), arguing that my attempt to base trademark on a type of fraud or contract-breach theory fails because, under my contract/IP theory, one cannot say that the consumer has a fraud or breach of contract claim. (I replied to this as noted below.) Libertarain critics use it against us too: See James W. Child, “Can Libertarianism Sustain a Fraud Standard?“, 104 Ethics 722 (1994).

The problem is in most people’s minds “fraud” basically means misrepresenting the truth—i.e., lying. But clearly merely lying is not a rights violation. I think imprecise use of “fraud” permits it to be used to arrive at unlibertarian conclusions. It is imperative to understand it properly and to integrate it into libertarian theory in a way that is compatible with our notions of property and rights and aggression.

I tried to to explain what fraud is, if it is to be considered a species of aggression (and to briefly debunk Child), in A Theory of Contracts (p. 34). As I wrote there,

The theory of contract espoused here demonstrates that fraud is properly viewed as a type of theft. Suppose Karen buys a bucket of apples from Ethan for $20. Ethan represents the things in the bucket as being apples, in fact, as apples of a certain nature, that is, as being fit for their normal purpose of being eaten. Karen conditions the transfer of title to her $20 on Ethan’s not knowingly engaging in ‘fraudulent’ activities, like pawning off rotten apples. If the apples are indeed rotten and Ethan knows this, then he knows that he does not receive ownership of or permission to use the $20, because the condition ‘no fraud’ is not satisfied. He is knowingly in possession of Karen’s $20 without her consent, and is, therefore, a thief.

In other words, for the libertarian, fraud is a type of aggression (namely, theft), just because it is a means by which one party receives or uses or takes the property of someone else without their consent—and there is failure of consent because the first party’s misrepresentation meant that one of the conditions to transfer of title was not satisfied. (I have elaborated on this in various articles and posts: see, e.g.: Reply to Van Dun: Non-Aggression and Title Transfer, pp. 60-61, where I tried to explain how a coherent theory of contract and fraud does, in fact, support a type of fraud claim compatible with the non-aggression principle; my exchange with David Heinrich in Comments: debt and the trade against risk; my comments in Objectivists on IP; my exchange with Heinrich regarding “limited liability” and corporations in this thread (2); my exchange, again, w/ Heinrich, regarding fractional reserve banking, in the comments section of Randians go from Mises to supply-side economics)

Looking at fraud this way, it is clear that for there to be fraud—at least of the type that counts as aggression—there must be some victim who did not give genuine consent for the defrauder to use or take his property. There must be a victim of the fraud, and the victimization must be of a type in which there is an ostensible title transfer but which fails because of lack of true consent.

Now in informal language you could use “fraud” more broadly and loosely to refer to any case where someone deceives someone else, but if it is merely sneaky, or shady, or untruthful, there is no fraud. If I put up a website claiming I wrote The Da Vinci code, this is a lie, but who is defrauded? You can call me “a fraud” but there is really no fraud committed. If I place a singles ad saying, “handsome and looks 10 years younger than he is”, to try to get some single women to give me a chance, is this really fraud?

[More on “Coercion”

Dizzan, fair points. I can see the argument that the term coercion is not completely neutral and has largely negative connotations; and that maybe we generally should “oppose” it since it is generally unjust.

But my point is mainly that I think it is misused as a synonym for aggression. Coercion, as I see it, is a set that intersects with aggression. That is, while some coercion is aggression, not all coercive acts are aggressive (e.g., threatening to harm an aggressor unless he returns to his jail cell); and not all acts of aggression employ coercion (if you simply murder someone, you have not used the threat of force to get them to do anything–it’s not coercion, it’s just aggression).

Therefore, I think the use of coercion is yet another in a long string of libertarian imprecision and lack of rigor in defining terms. It’s symptomatic of the tendency to over-rely on the use of metaphors and liberal-arts type language.

Against “Coercion”

Posted by Daniel McCarthy at July 7, 2006 12:17 AM

For once I have to disagree with Stephan Kinsella, who is right to point out that there can be legitimate, non-aggressive forms of coercion but who is wrong, I think, to suggest that the word is neutral. For the most part, it does (and has since long before Ayn Rand) imply something more than force applied in self-defense. The first definition given by Merriam-Webster’s on-line (for “coercing”) is “to restrain or dominate by force.” There are many times when libertarians would agree that restraint by force is necessary, but “dominate” is probably not a concept we would want connoted in the process.

The idea that coercion has something to do with state power goes back as far as the Latin forebear of the word — “coercitio” is the Roman term of art for “the infliction of summary punishment by a magistrate or other person in order to secure obedience to his will; also the right of doing so” (as per the Oxford Latin Dictionary). The fasces carried by the magistrates known as lictors were the symbol of the the state’s coercitio, which is more than just police power — it means the fundamental power of the state to enforce its will upon its citizens. The English word doesn’t have quite that meaning, of course, but does still bear the marks of its ancestry. I think we’re right to oppose it.

“Coercion” is annoying, but coercion is neutral

I must confess that one of my nits is the use by libertarians of the word “coercion” to mean “aggression.” I suspect this is a habit inherited from Ayn Rand’s repeated misuse of the term. Let’s get it straight: we libertarians oppose aggression, i.e. the so-called “initiation of force”, not force itself. To coerce is just to use force to make someone do something, to compel them. Coercion is just a type of use of force. Libertarianism is no more against coercion or force than it is against guns, which may be used for good, or evil.

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Paul Edwards July 17, 2006 at 6:54 pm

Stephan,

I’m glad you brought this up.

“Looking at fraud this way [a means by which one party receives or uses or takes the property of someone else without their consent], it is clear that for there to be fraud–at least of the type that counts as aggression–there must be some victim who did not give genuine consent for the defrauder to use or take his property. There must be a victim of the fraud, and the victimization must be of a type in which there is an ostensible title transfer but which fails because of lack of true consent.”

Applying this criterion to FR banking, let’s see how it fares:

In the most generous scenario of FR banking, where we presume both bank clients, the depositor and the borrower are aware of the impossible nature of the contract that they have involved themselves with the bank: i.e. that both the depositor and borrower possess simultaneous and exclusive title and control over the same money, and hence there is at least no victim between the three of them, there are still victims as a result of this agreement. The victims are other holders of money whose wealth has been transferred to the bank and its customers who have made the legally impossible agreement which impacts the value of money.

The praxeological nature of money, titles to money, and the special place that banks take in respect to them, allow the banks to collude with its customers to defraud other holders of money from their just wealth that they would otherwise have, that they loose due to this the allowance of these impossible contracts.

FR banking is fraud because it is a means by which one party receives or uses or takes the property of a victim without their consent.

RogerM July 17, 2006 at 6:59 pm

Thanks! The misuse of terminology is very frustrating. And it’s dishonest to use words in ways other than their commonly accepted usage.

JIMB July 17, 2006 at 7:05 pm

Paul – fractional reserve banking is not fraudulent if the issuing bank does not promise instant redeemability but rather market-price for their banknotes. Since the Fed will defend redemption at a fixed price and the bank could liquify all deposits, it is therefore not fraudulent.

What IS fraudulent is the dilution of “savings” if unspent dollars are seen as savings and the demand for dollars is “forced” by the federal income taxes and alternative currencies (effectively) prohibited by legal tender laws and capital gains taxes.

Deposits are in fact, properly seen as extending credit to the bank (operationally they are extending reserves that a bank can use to extend additional credit but in practice it is really extending credit because a failing bank can cause a loss of deposits or a significant time-delay in recapturing deposits at par).

Paul Edwards July 17, 2006 at 7:44 pm

I included some text from De Soto in posts i made here on the question:

http://blog.mises.org/archives/005283.asp#comments

Stephan Kinsella July 17, 2006 at 7:46 pm

Paul: “In the most generous scenario of FR banking, where we presume both bank clients, the depositor and the borrower are aware of the impossible nature of the contract that they have involved themselves with the bank: i.e. that both the depositor and borrower possess simultaneous and exclusive title and control over the same money, and hence there is at least no victim between the three of them, there are still victims as a result of this agreement.”

Okay, first. I find it confusing to refer to the “impossible nature of the contract.” What exactly does this mean? And I don’t agre that both dep and borr have title to the money. That is actually not possible, is it? So what is it, in actuality? It’s the depositor giving title to the bank; the bank making a contractual agreement to pay him this sum at any time “on demand”. Whether they will be able to do it or not, is a factual question–and the consequences of default would be specified in the agreement. But it is not 100% sure to be unable to repay on demand, a given depositor, is it?

“The victims are other holders of money whose wealth has been transferred to the bank and its customers who have made the legally impossible agreement which impacts the value of money.”

Hold on. Every “holder of money” accepts the money voluntarily from someone, right? Why are they defrauded? Why are they victims? Why aren’t they taking the money with its limitations? Why do you assume they *necessarily* can’t consent to the risks of inflation/default etc., much like the depositor can?

If depositor D deposits money in bank B, then B lends it out to borrower, um, R, now R has money that is part of this fiat currency system; if he offers some of this paper currency to a vendor V, why is V defrauded? What if I offer him monopoly money, in payment for a hot dog, with everyone being aware of the nature of the monopoly money–is he defrauded then? Clearly no. So why, in the case where he voluntarily accepts fiat currency?

“The praxeological nature of money, titles to money, and the special place that banks take in respect to them, allow the banks to collude with its customers to defraud other holders of money from their just wealth that they would otherwise have, that they loose due to this the allowance of these impossible contracts.”

Please give an example, and show how a given individual is possible put in the position of a defrauded victim in the scenario you are alluding to. I think this will either set me straight, or it will highlight the flaw in your thinking: My suspicion is what you are doing is not looking at the voluntary nature of transactions whereby “holders of money” come to hold it.

“FR banking is fraud because it is a means by which one party receives or uses or takes the property of a victim without their consent.”

Okay: if this is true, I agree, it is fraud. But please give me one clear, concrete example, showing me which party’s property is used without their consent, and who is doing the using, and exactly where the fraud is. Any clearcut example will do.

JIMB July 17, 2006 at 7:56 pm

Stephen — It is fraud because demand for dollars is “forced” by the combination of (a) the necessity of acquiring dollars to pay federal income taxes & (b) the prohibition of alternative currencies by legal tender laws and capital gains taxes (transaction tax), thus forcing people to take a dilution of their yield (even to negative yields for inflation) on money while it is held.

cynical July 17, 2006 at 7:58 pm

I don’t think FR Banking is necessarily fraudulent, either. As Rothbard pointed out in “What Has Government Done to Our Money”, the banks are assuming a “general warehouse contract” of homogenous items — i.e., as long as the bank can redeem ANY (not specific bills) money to depositers who demand redemption, then the contract is not violated. Rothbard goes on to note that a way around this would be for a “specific contract” with the bank, where it would have to redeem the exact things that you deposited with it.

Stephan Kinsella July 17, 2006 at 8:42 pm

jIMb: “Stephen — It is fraud because demand for dollars is “forced” by the combination of (a) the necessity of acquiring dollars to pay federal income taxes & (b) the prohibition of alternative currencies by legal tender laws and capital gains taxes (transaction tax), thus forcing people to take a dilution of their yield (even to negative yields for inflation) on money while it is held.”

Jim, I am afraid I don’t follow you. Are you saying that if “demand for” something is “forced” … this is fraud? What, exactly, is your definition of fraud you are using here? What does fraud have to do with “forced demand for things” (whatever this means)?

I would agree that legal tender laws are unlibertarian, but not because they are fraudulent; but because they commit aggression. Income tax is also a type of aggression, but what it has to do with fraud, I haven’t a clue. I have tried to explian what I think fraud is. I am not aware of a competing conception of fraud (that is clearly and coherently defined) that lets you call this “fraud”; or are you saying it’s fraud even by my definition?

A bit of clarification of terms would be very helpful here. I.e, if you are going to make such assertions, given that the terms used are fuzzy and have been used many ways, I think it’s incumbent on you to clearly define your terms and justify such definition if need be.

JIMB July 17, 2006 at 9:27 pm

Stephen – It’s fraud firstly because the yield for savers is diluted by a counterfeiting process (i.e. accomplished not by the market but by the violence of the state).

However, other components are necessary because a person could avoid the dilution by shifting to alternative currencies — What makes it theft is (a) the regulated impossibility of ordinary people to avoid the dilutive effects of new money by shifting to an alternative free-market money (legal tender laws and capital gains transaction tax prevent it from being economically viable) and (b) the income tax creating an artificial demand for government money irrespective of it’s (falling) market value. In concert these items create an artificial (i.e. non-market) demand for depreciating government money.

And of course you are familiar with the A.B.C. so I’ll forgoe any explanation of “some people gain at the expense of others” during the depreciation process.

Juan Fernando Carpio July 17, 2006 at 9:31 pm

Stephan:

One problem I see when libertarian theorists try to justify/criticize fractional-reserve banking is that a very large group of them seem to devise the whole concept in their minds, regardless of History and the specific kinds of contracts implied in banking (the Randian vice it may be called).

If one confuses “credit contracts” with “irregular deposit contracts”, or does not define both to start with, a sterile and endless discussion usually begins.

A credit contract means that you asume risk, but gain interest for lending your money to the bank. In that case, it is asinine to supose the money will stay at the bank’s vault and *at the same time* be profitable for the banker to pay you interest.

An irregular deposit contract (a Roman-law term) implies that you pay (in some way, generally in a monetary way) the bank to store fungible (commodifiable) goods for you, and when you come back you can get back an equivalent amount and quality of goods (in some obvious, non-metal cases, it is impossible to get the same).

As we see, in this second type of contract (Jesus Huerta de Soto shows historical proof that this was the main business of banks, not credit to and from other people), the banker has made a promise (contractual, to be sure) to keep the fungible goods available at all times to all the customers.

So, when discusing fractional vs. 100% reserve banking, one has to be sure which type of contract one is analyzing. Otherwise, it is not only harmful but maybe even pointless.

Stephan Kinsella July 17, 2006 at 10:31 pm

JimB:

I had asked you several questions about your conception of fraud, asking you “Are you saying that if “demand for” something is “forced” … this is fraud? What, exactly, is your definition of fraud you are using here? What does fraud have to do with “forced demand for things” (whatever this means)?”

I asked you for clarification of the terms you are using.

Your reply is: “Stephen – It’s fraud firstly because the yield for savers is diluted by a counterfeiting process (i.e. accomplished not by the market but by the violence of the state).”

I take it you are not interested in answering my questions asking for an explicit explanation of your terms and reasoning, instead just repeating some kind of compound conclusory statement. Again, I ask you (futiley, most likely), what is your definition of fraud, and exactly who is a victim and why? You seem, e.g, to equate state-violence with fraud. If A robs B, has he defrauded him? I doubt it. He has just robbed him. If the state robs you, has it “defrauded” you? Why? Where is teh “fraud”? What is your *definition* of fraud?

Yes, I of course agree with Hoppe, Huelsmann, et al. that fractional reserve banking is utter nonsense and uneconomic; and that those who advocate it are basing their advocacy on economic confusion. They are essentially, I believe, trying to get something for nothing (benefit from loaning money out while the depositor still “has” it); and they are trying to solve a non-real problem (the “stickiness” of markets adjusting to deflationary pressures etc., or increased demand for money). But I don’t see how any of this indicates any “fraud”. Of course, it’s easier to wave a hand at it all, and say, “It’s all rubbish. All fraud. Do you hear me! ALL FRAUD!” if one does not define what one means by “fraud”. If one means by it “rubbish” or “illegitimate shenanigans,” then I’d quite agree with you. I thought “fraud” was a word, however, and as such was supposed to have a particular meaning.

JIMB July 17, 2006 at 11:24 pm

Stephan — Fraud: representing one thing as another so that an entity can steal what is not rightfully theirs.

For heaven’s sake, what terms really need defining? Fraud? Dilution? Counterfeiting? Legal Tender? Capital gains tax?

Look at it this way: where does the wealth go when you destroy a $1 bill? It goes from you to everyone else (less money covering same amount of goods). Similarly, where does the wealth go if you print $1 bill and don’t work for it? It flows from everyone else to you (more money covering the same amount of goods). That’s fraud if people are forced to use the currency because it’s an involuntary confiscation of property.

Bottom line, if I can dilute your “share” of goods purchasable by money, I can steal from you.

Stephan Kinsella July 17, 2006 at 11:53 pm

Jim: “Stephan — Fraud: representing one thing as another so that an entity can steal what is not rightfully theirs.”

Ah. Good. So we are getting somewhere. So you agree it’s basically what I said. Good.

“For heaven’s sake, what terms really need defining? Fraud? Dilution? Counterfeiting? Legal Tender? Capital gains tax?”

Fraud.

“Look at it this way: where does the wealth go when you destroy a $1 bill? It goes from you to everyone else (less money covering same amount of goods). Similarly, where does the wealth go if you print $1 bill and don’t work for it?”

Close, but no, printing it does nothing. It’s spending it that does it. Now, would it be fraud to spend that money? Well, if you represent it *as a “real” (non-faked) note* to a seller and buy from them a good, then yes, you’ve defrauded them.

But you see here, it is because of the misrepresentation made by the buyer to the seller.

So, please show me where, in today’s money system, someone is actually defrauded when he voluntarily takes dollar bills in exchange for a good or service. Are you saying the buyer who is paying in dollars is misrepresenting some essential attribute of the money he is paying with?

” It flows from everyone else to you (more money covering the same amount of goods). That’s fraud if people are forced to use the currency because it’s an involuntary confiscation of property.”

You lost me again. forcing people to use money is fraud?

“Bottom line, if I can dilute your “share” of goods purchasable by money, I can steal from you.””

er, okay, but are you now saying that all theft is fraud? Or is dilution fraud?

Daniel Sanchez July 17, 2006 at 11:56 pm

Why does consent imply a meeting of conditions? A giver clearly consents to the giving in his physical offering of the gift. He trusts that conditions are met, and so he consents to give. His trust may be violated, but that does not mean his property has been.

Say that, without prompting, a woman offers to sleep with her boss if agrees to give her a promotion. And say he agrees, but then reneges on his end of the deal after they sleep with each other. He may very well be guilty of a crime under many jurisdictions. But can he be said to be a rapist? Which is to say, can we say the woman did not give her consent for sex, merely because the conditions of the deal were not met?

Calling that episode a rape is as incorrect as claiming that fraud is aggression.

Stephan Kinsella July 18, 2006 at 12:20 am

Daniel S: “Why does consent imply a meeting of conditions? A giver clearly consents to the giving in his physical offering of the gift. He trusts that conditions are met, and so he consents to give. His trust may be violated, but that does not mean his property has been.”

Because the owner of property may give it away unconditionally, or conditionally. In a bilateral contract, what is typically done is each party transfers title based on some conditions.

Re your rape case: no, it is not rape, because the boss’s promise is just that, a promise. There is no *title transfer* involved here.

To better understand where we are coming from, perhaps you would be better to familiarize yourself with What Has Gone Before (e.g., the title theory of contract–which I linked to previously, along with other background material) rather than us having to give you a primer in this forum.

Nima Mahdjour July 18, 2006 at 12:21 am

I think your article is to the point.

In fact, we don’t need to assert that commiting fraud violates the ethics of liberty.

The term “fraud” is too broad and as it is with terms, different people attach different meanings to them.

By saying that aggression is to be prevented, you automatically cover (the to the libertarian “undesired” type of) fraud.

If I purchase a bucket of apples, and it is clear that I purchase them in order to eat them, then the contract stipulates tacidly: “I am exchanging this $20 bill for a bucket of apples in order to eat them.”

If those apples cannot be eaten, the contract is invalid and I am still entitled to the $20 I handed over to the counterparty.

Every private court that tries to be competitive and attract as many clients as possible would interpret the contract more or less the way I described it and pursue the according adjudication.

As far as fractional reserve banking: It doesn’t really matter if you want to call it fraud or not. Fractional reserve banking is a coercive system the inauguration of which coincided with one of the most severe instances of forceful expropriation.

Just because people have been disowned of their gold and it is now impossible to redeem paper notes in specie, doesn’t mean that people wouldn’t do it in a free, unhampered, and non-coercive banking system if banks pursue inflationary policies (as they inherently do in fractional reserve banking).

In addition to that come the legal tender laws that force people to accept dollar bills or demand deposit transfers as legal payments.

Best regards,
Nima

Paul Edwards July 18, 2006 at 1:54 am

Stephan,

“Okay, first. I find it confusing to refer to the “impossible nature of the contract.” What exactly does this mean?”

It means that the depositor is led to believe and is therefore acting as if he has deposited his funds with the bank and retains title to them, has obtained a warehouse receipt to them, and has retained the right to redemption of them on demand at par; whereas, at the very same time, the banker acts as if the depositor actually loaned the funds to it, thus assuming title to this very same money, and therefore presuming to have the right to again loan out this money to other borrowers.

“And I don’t agre that both dep and borr have title to the money. That is actually not possible, is it? So what is it, in actuality?”

Well from a legal standpoint, I believe you are indeed correct: it is actually not possible for both the depositor and the bank to both have title to the same money. But it turns out that both are acting as if this is exactly the case. So it is both impossible, and yet, apparently, exactly what the two parties have agreed to.

“It’s the depositor giving title to the bank; the bank making a contractual agreement to pay him this sum at any time “on demand”. Whether they will be able to do it or not, is a factual question–and the consequences of default would be specified in the agreement. But it is not 100% sure to be unable to repay on demand, a given depositor, is it?”

A deposit is not a loan and so, especially to the depositor, title to the deposit remains with him. If a deposit were a loan, it would be called a loan, title would clearly transfer to the bank, and there would be no pretense of it being available on demand to the depositor. There is no question that the bank, in lending out duplicate warehouse receipts to this deposited money, will necessarily and intentionally render itself unable to fulfill all of its contractual obligations to redeem on demand the receipts it issues to the depositors and borrowers.

Me: “The victims are other holders of money whose wealth has been transferred to the bank and its customers who have made the legally impossible agreement which impacts the value of money.”

“Hold on. Every “holder of money” accepts the money voluntarily from someone, right? Why are they defrauded? Why are they victims? Why aren’t they taking the money with its limitations? Why do you assume they *necessarily* can’t consent to the risks of inflation/default etc., much like the depositor can?”

That sounds like “blaming the victim” to me. (I’m just kidding you, Stephan.) But seriously, start with the presumption that we have a free market with real money and honest 100% backed money substitutes. People have a right to use honest money and/or money substitutes don’t they? But then introduce into the system through banks or warehouses that were previously providing 100% backed money substitutes, new similar looking and feeling “money substitutes” but with the characteristic that they are in reality very different. So different as to be rendered very literally a lottery ticket to title to the face value of this certificate in money, rather than an actual definite title to this money that they were before. People don’t accept monopoly money, and they would not accept such a lottery ticket either, where before they demanded real title to money. The success of these duplicate claims to money lies in the confusion and confidence that the banks and warehouses have built up over time. Those who accept these false titles to money have been swindled because they can’t imagine they would be offered lottery tickets in lieu of real titles to money.

“If depositor D deposits money in bank B, then B lends it out to borrower, um, R, now R has money that is part of this fiat currency system; if he offers some of this paper currency to a vendor V, why is V defrauded? What if I offer him monopoly money, in payment for a hot dog, with everyone being aware of the nature of the monopoly money–is he defrauded then? Clearly no. So why, in the case where he voluntarily accepts fiat currency?”

If V accepts these is he really thinking in his mind that these lottery tickets may actually not at all be redeemable in money? People may appear foolish from a certain perspective, but praxeology also shows us that people are self interested. They trade real wealth for money, not risky lottery tickets. When you offer money, there are implicit characteristics to this money: one is that it is a present good, and another is that it is not a lottery ticket.

Me: “The praxeological nature of money, titles to money, and the special place that banks take in respect to them, allow the banks to collude with its customers to defraud other holders of money from their just wealth that they would otherwise have, that they loose due to this the allowance of these impossible contracts.”

“Please give an example, and show how a given individual is possible put in the position of a defrauded victim in the scenario you are alluding to. I think this will either set me straight, or it will highlight the flaw in your thinking: My suspicion is what you are doing is not looking at the voluntary nature of transactions whereby “holders of money” come to hold it.”

Imagine accepting a lottery ticket to a claim to the money that you are asking for in exchange for a good you are trading for it. If you wanted money, would you take the lottery ticket? I think not. But if not, then what are you doing? You thought you were accepting money, when in fact you were accepting a lottery ticket to that amount of money; you were necessarily defrauded. But where is the harm, if we all fall for it? Praxeology shows that it harms many people in many different ways: malinvestments, bankruptcies, bank runs, business cycles, job losses, emotional stress, and lost productivity and lowered living standards. We know these are necessarily the results of messing with these false money titles.

Paul: “FR banking is fraud because it is a means by which one party receives or uses or takes the property of a victim without their consent.”

“Okay: if this is true, I agree, it is fraud. But please give me one clear, concrete example, showing me which party’s property is used without their consent, and who is doing the using, and exactly where the fraud is. Any clearcut example will do.”

If the above doesn’t do it for you, I will throw two related issues at you:

Private embezzlement (successful and undiscovered): fraud or not?

Private counterfeiting (successful and undiscovered): fraud or not?

It strikes me that these two are in a similar class of fraud as FR banking only they have less potential to adversely affect as many individuals.

Tracy SAboe July 18, 2006 at 2:12 am

I’ve been saying for years to people that the definition of fraud is so expansive that it really shouldn’t be anything the government does anything with — because you can prosecute fraud so expansively that you live in totalitarianism.

Tracy

banker July 18, 2006 at 2:52 am

Ebay has a wonderful way of dealing with these issues. As anyone who has ever bought anything on Ebay knows you can never be sure what you are purchasing. Fortunately, with seller feedback and services like Paypal, issues like fraud are dealt with without the need of any government intervention. Only cases of outright theft where no product is delivered is worthy of criminal prosecution.

ktibuk July 18, 2006 at 6:43 am

What the Central Banks do is a text book case of fraud.

Every CB promises everybody that it is fighting “inflation”, or trying to keep the purchasing ÄŸower of the currency.

This is the promise. As in every fraud you cant keep the promise out of the loop and say every cash holder must be responsible. Or you would also be saying the buyer should have checked if the apples were rotten or not, on the above example.

Based on this promise unfortunately ignorant lay men keep cash.

Then we all know what happens.

What the CB’s do everywhere is fraud. Fraud on a scale never been witnessed in the history of humanity.

quasibill July 18, 2006 at 7:13 am

Stephan,

in re: fractional reserve banking, I agree that absent a state, it is hard to pigeonhole FR banking as outright fraudulent, because people will be aware of certain details. That said (and obviously PE’s post is more detailed than what I can articulate, but I’ll try anyway) you need to define what a deposit contract with a bank is before you can determine whether fraud is involved (as I believe Juan pointed out).

If, as in the current system (through FDIC) a depositor is led to believe that his money is still his money, just bailed out to the bank, then it IS fraud for the bank to then represent that money as its own or another depositor’s.

The analogy in the absence of a state would be a bank that promised to merely be a gratuitous bailee, or perhaps bailee for hire, who then sold the property at issue to a third person, or used it to cover his debt to a third person. I think this situation would satisfy your definition of fraud.

Now, on the other hand, a FR “bank” that held itself out as an investment vehicle would not be fraudulent, I agree. But as should be clear from my use of quotes, I’m not so sure most people would consider that a bank, as the term is commonly used by laymen.

JIMB July 18, 2006 at 11:03 am

Stephan — Forcing people to use currency which is systematically diluted against their free choice is fraud.

It’s not fruitful to say that the “spending does it” because there can be no spending and the effects would still be felt.

For instance, an increase in the demand to hold money would normally lower prices: printing money means the lower prices don’t occur. The people that would have benefitted from lower prices (generally savers) now lose out to those people able to obtain new money.

The monetary system is coercive: people are forced to use goverment money and some people get new money – gaining at the expense of those that others that fully work for it: that’s the point.

It’s only when the situation gets so egregious that the dollar losses exceed the costs of capital gains taxes does it make sense to currency shift; and then some demand still exists for government money because of legal tender laws.

JIMB July 18, 2006 at 11:10 am

2nd sentence should read: It’s not fruitful to say that the “spending does it” because there can be no NEW spending and the effects would still be felt.

cynical July 18, 2006 at 12:28 pm

Everyone posting that FR Banking is fraud is seriously misunderstanding the issue.

Dilluting the currency is (“textbook”) fraud? What? From a government mission statement-perspective?

Forcing people to use currency, which is systematically dilluted, against their free choice is fraud? HUH?! No, THAT is NOT fraud. It IS wrong, but it is NOT fraud.

chance July 18, 2006 at 1:13 pm

Stephan,

Suppose I go down to Home Depot. I agree to pay some guy 10$ an hour to work for me. At the end of the day, I tell him to get lost. (don’t pay him, and run away).

By my intuitive definition, that seems like pretty clear cut fraud. I don’t see how it fits in to your definition.

But, I think the people who are saying the FR banking is by its nature fraud aren’t thinking objectively. If all 3 parties involved know exactly what is happening, and all three act esactly as they have agreed to, then its not fraud by any rational definition.

quasibill July 18, 2006 at 2:08 pm

Chance,

Your Home Depot example isn’t necessarily fraud. It is fraud if, when you made the contract, you did not intend to pay the man.

However, if you intended to, but merely later discovered that you didn’t actually have the $10, it’s not fraud, it’s a breach of contract. You have to be very careful not to turn every breach of a contract into a fraud case.

“But, I think the people who are saying the FR banking is by its nature fraud aren’t thinking objectively. If all 3 parties involved know exactly what is happening, and all three act esactly as they have agreed to, then its not fraud by any rational definition.”

See my post above about the definition of a deposit contract. I think the definition is important to placing these people’s claim of fraud into context.

Stephan Kinsella July 18, 2006 at 2:36 pm

Okay, lots of comments while I’ve been out. Before replying to (some of) them, let me try to clarify a few issues.

The main question is: should (private) fractional reserve banking be outlawed? Not whether the current (government) system is “fraud”, though this question is of interest too. Austrian opponents of fractional reserve banking maintain not only that it is a house of cards economically (with which I agree), but also that it is somehow inherently fraudulent. (I have added some links to the main entry above to some writing by Hoppe, Reisman, Rothbard et al. on this.)

Now, let us be clear: not all crime or theft is fraud. Fraud is a specific means of basically stealing someone’s property: it is gaining access to or control of someone’s property by means of some misrepresention, misrepresentation of a type as to void the consent needed from the owner, to make the fraudulent party’s control or use of the property permissible. That is *why* fraud is a type of theft: it is a means of gaining control of property which is not consented to by the owner.

Now, I do believe the current fiat money system is illegitimate, and uneconomic to boot; whether it is a fraud or not, I am not sure. A and B both use fiat money because the government has foisted this system on us, by monopolizing the money/banking system and cutting the ties to gold. These actions are all illegitimate and rights violation; that does not necessarily make them fraudulent. It does not matter really whether it’s fraud here, because we already agree the current government money system is illegitimate.

But the fractional-reserve opponents say that even a private fractional reserve banking system necessarily commits fraud. I say this is not correct. Why? Well, I can see only two possible acts of fraud: 1, when the bank spends money A has deposited; or 2, when A gives money to B in payment for a good or service.

Fraud can only be committed, if the bank misrepresents to A some aspect of the transaction. Or, if A is misrepresnting to B the nature of the money he is paying B.

In both cases I think you cannot maintain it is fraud. In the latter case, A is just giving money to B; B knows what this is: it is a piece of the money currently in circulation. I see no misrepresentation by A.

In the former case, let’s just say that in anarchotopia the bank managers are prosecuted for “fraud” for loaning out money that A deposited. Okay, so the next day, all the freebanks will put up little signs, or make the depositor sign an agreement, specifying that a fraction of A’s “deposit” may be loaned out; but that the bank has a system of assets etc. in place that it expects will permit it to redeem a demand for the deposited money at any time; and that the customer has no claim against the bank for fraud solely based on this; and that the bank cannot guarantee to repay all the money, but does believe (according to its experience and economic theory) it will have no trouble meeting its demand repayment obligations.

Now, if the opponents of fidiciary media would say that in this case, there is no fraud, then we are all in agreement. But I take it that this is not the case; that the opponents would insist that “by its nature” there is still “a fraud” committed. I think this is just completely unsupportable. If there is a fraud, then there is a victim. If the victim *consents* to the action, explicitly; and forswears any claim, there is no victim, and therefore no fraud. I don’t see how it can be any plainer than this.

Now, I will reply separately to some comments, and would like to know if the fiat-opponents here would agree that there is no fraud if adequate disclaimers are given; or if there is fraud anyway. In the latter case, please explain how there can be fraud with no victim.

Juan Fernando Carpio July 18, 2006 at 3:02 pm

Stephan:

You have unadvertedly fallen into a loop.

When you say “Now, I will reply separately to some comments, and would like to know if the fiat-opponents here would agree that there is no fraud if adequate disclaimers are given; or if there is fraud anyway. In the latter case, please explain how there can be fraud with no victim.” you are commiting an error you are very clear to point out (in your estoppel paper, for example), namely that of violating the law of identity.

Fraud implies a breach of contractual-promise (like in estoppel?) or contract. If you “disclaim” or anounce fraud, then it is a different content for the contract (and irrelevant, whatever it may be) and there is no breach, surprise, deceive, etc.

A fraud needs to be a fraud, not a disclaimer. Telling somebody “I am going to deceive you on this” is a contract, not fraud. If you tell the victim on an apriori basis, then you de-victimize him/her and no fraud is possible.

Stephan Kinsella July 18, 2006 at 3:10 pm

Quasibill: “Your Home Depot example isn’t necessarily fraud. It is fraud if, when you made the contract, you did not intend to pay the man.

However, if you intended to, but merely later discovered that you didn’t actually have the $10, it’s not fraud, it’s a breach of contract. You have to be very careful not to turn every breach of a contract into a fraud case.”
Excellent.

JIMB: “Stephan — Forcing people to use currency which is systematically diluted against their free choice is fraud. ”
Why? Not all aggression is “fraud”.

“The monetary system is coercive: people are forced to use goverment money and some people get new money – gaining at the expense of those that others that fully work for it: that’s the point.”

Well, as noted above, I think you mean “aggression” not “coercion” here. Anyway, even if it’s aggression, it does not mean it’s fraud.

Plus, the opponents of fiduciary media claim that *even private fractional reserve banking” is fraudulent.

Quasibill: “in re: fractional reserve banking, I agree that absent a state, it is hard to pigeonhole FR banking as outright fraudulent, because people will be aware of certain details.”

Right.

“That said … you need to define what a deposit contract with a bank is before you can determine whether fraud is involved (as I believe Juan pointed out).”

I disagree. If the purported “victim” is aware of the nature of the system—or certainly, if he signs a disclaimer—then he is not a victim, no matter what or how you “define” the nature of the agreement. Maybe it is indeed the other way around: if he is no victim, and there is no fraud, then perhaps maybe this implies something about the nature of the contract—maybe that means it’s not a genuine “deposit” (despite having that label) but is really something else, like a credit. I don’t care. It’s irrelevant. This bizarre focus on names and words as if they are incantations is just bizarre. Law deals with the justice of the situation. For a similar reason I have written that Rothbard’s black-and-white dichotomy between the *words* promise and contract was just unsupportable: just because “promises” are not enforceable does *not* mean that if the word “promise” is used, there is not a contract created!
“If, as in the current system (through FDIC) a depositor is led to believe that his money is still his money, just bailed out to the bank, then it IS fraud for the bank to then represent that money as its own or another depositor’s.”
Well, actually, in today’s system, I think there IS NO FRAUD just because of FDIC insurance. What does a bank today tell a depositor?—that his account is “federally insured.” Right? Well, as a matter of fact, this is true: it is insured. No fraud there. And, if a “deposit” is insured, this to me seems to serve adequate notice to the idiot depositor—caveat emptor and all that, which libertarians used to believe in, but now apparently no longer do, in their zeal to oppose a stupid fiat banking system, they have adopted consumer protectionism!—that of course the money is no longer there! If the money were not being lent out then why would it need to be insured? And of course the fact that you earn interest also serves notice to anyone with half a brain that it’s being lent out. So I think even today’s system has no fraud at all. It is based on criminality, sure; but not fraud.

“The analogy in the absence of a state would be a bank that promised to merely be a gratuitous bailee, or perhaps bailee for hire, who then sold the property at issue to a third person, or used it to cover his debt to a third person. I think this situation would satisfy your definition of fraud.”
No, not if the bank (a) disclaimed any liability in this regard, or (b) notified the customer it would sell it to a third person, or (c) told the “depositer” they would pay him money based on profit they earned by letting others use it etc.
Caveat emptor, baby.

“Now, on the other hand, a FR “bank” that held itself out as an investment vehicle would not be fraudulent, I agree. But as should be clear from my use of quotes, I’m not so sure most people would consider that a bank, as the term is commonly used by laymen.”

So what. Why this consumerism all of a sudden. Caveat emptor. If you have insurance, why do you think that’s needed? Duh. If you earn interest, how do you think that happens? Duh. If you occasionally borrow money from the bank, where do you think that’s coming from? Duh.

Ktibuk: “What the Central Banks do is a text book case of fraud.”

No, it’s not (see above); but even if it were, the argument is that even private fiduciary media is fraudulent.

Paul Edwards:

SK: “Okay, first. I find it confusing to refer to the “impossible nature of the contract.” What exactly does this mean?”

PE: “It means that the depositor is led to believe and is therefore acting as if he has deposited his funds with the bank and retains title to them, has obtained a warehouse receipt to them, and has retained the right to redemption of them on demand at par; whereas, at the very same time, the banker acts as if the depositor actually loaned the funds to it, thus assuming title to this very same money, and therefore presuming to have the right to again loan out this money to other borrowers.”

So what. If the “victim” is sufficiently aware of the nature of the system, or is sufficiently apprised of it by the bank (and believe me, they would have adequate signs or disclaimers after the first successful prosecution for “fraud”), or if he signs sufficient disclaimers when making the “deposit,” then he is not a victim, is not defrauded.
“Well from a legal standpoint, I believe you are indeed correct: it is actually not possible for both the depositor and the bank to both have title to the same money. But it turns out that both are acting as if this is exactly the case. So it is both impossible, and yet, apparently, exactly what the two parties have agreed to.”

So? If two parties “agree” to something that is “impossible,” that does not mean either one of them “defrauded” the other.

“A deposit is not a loan and so, especially to the depositor, title to the deposit remains with him. If a deposit were a loan, it would be called a loan, title would clearly transfer to the bank, and there would be no pretense of it being available on demand to the depositor.”

I frankly don’t care what it is “called”. I think this is too much focus on labels. I can call a pile of crap a rose but that does not make it so. The point is there is no fraud if there is no misrepresentation and no victim. If there is adequate disclaimer, there is no misrepresentation, period. See above re my comments about caveat emptor and consumer protectionism.

“There is no question that the bank, in lending out duplicate warehouse receipts to this deposited money, will necessarily and intentionally render itself unable to fulfill all of its contractual obligations to redeem on demand the receipts it issues to the depositors and borrowers.”
So? The depositor knowingly takes this risk. And actually, in *today’s* system, there is actually federal deposit insurance, so this is actually incorrect: in today’s system, the bank is not necessarily unable to redeem on demand.

NSK: “The victims are other holders of money whose wealth has been transferred to the bank and its customers who have made the legally impossible agreement which impacts the value of money.”

“Hold on. Every “holder of money” accepts the money voluntarily from someone, right? Why are they defrauded? Why are they victims? Why aren’t they taking the money with its limitations? Why do you assume they *necessarily* can’t consent to the risks of inflation/default etc., much like the depositor can?”

PE: “…start with the presumption that we have a free market with real money and honest 100% backed money substitutes. People have a right to use honest money and/or money substitutes don’t they?”

No, not exactly. I never heard of a “right to use money”.

“But then introduce into the system through banks or warehouses that were previously providing 100% backed money substitutes, new similar looking and feeling “money substitutes” but with the characteristic that they are in reality very different. So different as to be rendered very literally a lottery ticket to title to the face value of this certificate in money, rather than an actual definite title to this money that they were before. People don’t accept monopoly money, and they would not accept such a lottery ticket either, where before they demanded real title to money. The success of these duplicate claims to money lies in the confusion and confidence that the banks and warehouses have built up over time. Those who accept these false titles to money have been swindled because they can’t imagine they would be offered lottery tickets in lieu of real titles to money.”

See my previous post. If you are talking about a private system, then there is no fraud as long as there is adequate disclosure (and I would argue this is inherent, given the nature of the system that pays interest!). And if you are talking about today’s system, I won’t defend it, but the problem with it is not that it is fraudulent.

NSK: “If depositor D deposits money in bank B, then B lends it out to borrower, um, R, now R has money that is part of this fiat currency system; if he offers some of this paper currency to a vendor V, why is V defrauded? What if I offer him monopoly money, in payment for a hot dog, with everyone being aware of the nature of the monopoly money–is he defrauded then? Clearly no. So why, in the case where he voluntarily accepts fiat currency?”

PE: “If V accepts these is he really thinking in his mind that these lottery tickets may actually not at all be redeemable in money? People may appear foolish from a certain perspective, but praxeology also shows us that people are self interested. They trade real wealth for money, not risky lottery tickets. When you offer money, there are implicit characteristics to this money: one is that it is a present good, and another is that it is not a lottery ticket.”
I don’t know about this. In any economy where any kind of money is in use—private fidicuiary media or today’s government money—then everyone has and uses money. V asks for money-of-that-type, and gets it. No fraud. He is just mistaken or confused about the true nature of that money. If V wants to accept “monopoly money” or colored confetti in payment for a glass of lemonade, he is also not defrauded.

“Imagine accepting a lottery ticket to a claim to the money that you are asking for in exchange for a good you are trading for it. If you wanted money, would you take the lottery ticket? I think not. But if not, then what are you doing? You thought you were accepting money, when in fact you were accepting a lottery ticket to that amount of money; you were necessarily defrauded. But where is the harm, if we all fall for it? Praxeology shows that it harms many people in many different ways: malinvestments, bankruptcies, bank runs, business cycles, job losses, emotional stress, and lost productivity and lowered living standards. We know these are necessarily the results of messing with these false money titles.”

I agree that a fiat system is bad economically and would have disastrous effects; as it does today. That does not imply a rights violation, necessarily. As for the lottery ticket—when I accept dollars in payment I am not getting a lottery ticket. I am getting just what I ask for: fiat currency.

“Private embezzlement (successful and undiscovered): fraud or not?”

No, it’s just theft.

“Private counterfeiting (successful and undiscovered): fraud or not?”

Yes, because you are taking some good in exchange for a fake-thing. You are telling the seller “this is genuine currency” but you know it is really “counterfeit” and you are using this misrepresentation to gain control of the good you are “buying” with it. Sure, this is fraud (given the right assumptions and context).

Stephan Kinsella July 18, 2006 at 3:18 pm

Carpio:

“When you say “Now, I will reply separately to some comments, and would like to know if the fiat-opponents here would agree that there is no fraud if adequate disclaimers are given; or if there is fraud anyway. In the latter case, please explain how there can be fraud with no victim.” you are commiting an error you are very clear to point out (in your estoppel paper, for example), namely that of violating the law of identity.”

Well, I don’t think it’s possible to violate the law of identity, and anyway don’t see that such an action would be aggression. I guess it would be magic. I assume you don’t mean something so trite, but if so, I am not sure what.

“Fraud implies a breach of contractual-promise (like in estoppel?) or contract.”

Does it? I am not so sure. What is “breach” of contract anyway? Contracts just specify transfers of title to property based on certain conditions.

“If you “disclaim” or anounce fraud, then it is a different content for the contract (and irrelevant, whatever it may be) and there is no breach, surprise, deceive, etc.”

Maybe. I don’t know. All I know is if there is adequate discalimer then there is no misreprentation.

“A fraud needs to be a fraud, not a disclaimer. Telling somebody “I am going to deceive you on this” is a contract, not fraud.”

I am jsut giving exmaples of various ways and contexts in which it would be the case that the “victim” was actually aware of the nature of what the bank was doing with his “deposit,” to show that there is no misrepresentation and thus no fraud.

” If you tell the victim on an apriori basis, then you de-victimize him/her and no fraud is possible.”

This, however, is not what is claimed by the opponents of FR — they claim it is inherently, or necessarily, fraudulent. I guess you disagree with them.

Paul Edwards July 18, 2006 at 3:20 pm

Stephan,

Your formatting is usually the prettiest. What happened? Oh well, i’ll muddle my way through it :)

Juan Fernando Carpio July 18, 2006 at 3:26 pm

Stephan:

Violating the law of identity is of course impossible. But thinking one can is very possible, or acting against it.

Fraud, if anounced, cannot be fraud. Fraud is Fraud. A = A. Right?

Those various ways and contexts are to be classified between credit and irregular deposits, first and before any further qualification of “fraud” or “respected contract”. A credit is not a deposit. Please.

I do disagree with the opponents of FR, but also with you and/or with a lot of Austrians if and only if you/they Randianly (it might as well be “ramdomly”) devise the whole problem disregarding the difference between credit and deposit.

If the bank tells you that it will have 10% of your credit in the vault but pay you no interest, you are no victim, nobody is committing fraud against you. But if it accepts money for keeping 100% of your fungible goods available for you (and does so for all other customers, since this is a deposit, not credit) and it doesn’t, it is fraud.

Michael July 18, 2006 at 3:32 pm

Ok, the essay was, of course, excellent. Let me address the fractional reserve banking system and fraud. At some point later, I will have time to gather all my thoughts and expound on this at length, but for the moment, I think there is something to be said for the people calling FRB fraud.

It seems to me that the Constitution is something of a social contract which all Americans have been coerced into. Given that the Constitution directs the government to “promote the general welfare,” and given that politicians and bureaucrats claim they are doing just that, and given that taxpayers and citizens have to act (praxeologically), and given that coercive government policies affect incentive structures (marginal propensity to consume/save, for instance), and given that FRB, among other atrocities it can be associated with, constitutes a “hidden” tax not depicted on the official government ledgers, and given that FRB affects the “REAL” interest and inflation rates while simultaneously disguising both, by design no less, then I must conclude that the federal government is acting in bad faith (am I using that term right, Stephan?) and is actively seeking to covet and de facto does covet property belonging to others via trickery and deceit and therefore is engaging in fraud, the way I think you have defined the term.

If anyone read all of that, I apologise. ;)

Manuel Lora July 18, 2006 at 3:43 pm

Michael,

I disagree with almost everything you’ve said. Bad faith? Sure, but that’s not a crime. The government and any paper called a “Constitution” is neither a social contract nor something that promotes welfare. It’s just aggression.

Stephan Kinsella July 18, 2006 at 3:51 pm

Juan:

“Violating the law of identity is of course impossible. But thinking one can is very possible, or acting against it.”

OKay. I guess. I don’t find this very rigorous or helpful.

“Fraud, if anounced, cannot be fraud. Fraud is Fraud. A = A. Right?”

I’m saying that if the bank accepts a “deposit” and the depositor knows that the bank intends to loan the money out, then there is no misrepresentation, so no fraud.

“Those various ways and contexts are to be classified between credit and irregular deposits, first and before any further qualification of “fraud” or “respected contract”. A credit is not a deposit. Please.”

I don’t care waht the natuer of the “deposit” is–whether the economist wants to calssify it as deposit or credit. For the question of rights and justice, the only question is: was the “depositor” defrauded? I say, no, since what the bank is giving him or doing w/ the money is not misrepresented; nor is the bank doing anything w/ the money they don’t have the rihgt to do.

Actually the more I think about it, *even if* the “depositor” is really deceived, it is still not fraud. It is, instead, conversion (theft). Why? If I give you my object to hold for me, and pay you for it, and you then go sell it or give it away, you are using my property in a way you do not have consent to use; it’s theft.

So in the FRB context, the question is: does the bank have the depositor’s consent to lend the money out, or not? If they don’t, then it’s theft, when they do it. If they do, then it’s not theft. Adn I say they do, since the depositor gets interest and anyway, is generally aware banks loan out the money that is deposited with them.

There is no theft, and there is no fraud. There are only stupid depositors who deserve to be separated from their money, and bankers ignorant of economic theory.

“I do disagree with the opponents of FR, but also with you and/or with a lot of Austrians if and only if you/they Randianly (it might as well be “ramdomly”) devise the whole problem disregarding the difference between credit and deposit.”

I am not sure what you are saying.

“If the bank tells you that it will have 10% of your credit in the vault but pay you no interest, you are no victim, nobody is committing fraud against you. But if it accepts money for keeping 100% of your fungible goods available for you (and does so for all other customers, since this is a deposit, not credit) and it doesn’t, it is fraud.”

Um, no, it’s not, if I am informed they’ll loan 90% of it out to others.

Michael:

“It seems to me that the Constitution is something of a social contract which all Americans have been coerced into. Given that the Constitution directs the government to “promote the general welfare,” and given that politicians and bureaucrats claim they are doing just that, and given that taxpayers and citizens have to act (praxeologically), and given that coercive government policies affect incentive structures (marginal propensity to consume/save, for instance), and given that FRB, among other atrocities it can be associated with, constitutes a “hidden” tax not depicted on the official government ledgers, and given that FRB affects the “REAL” interest and inflation rates while simultaneously disguising both, by design no less, then I must conclude that the federal government is acting in bad faith (am I using that term right, Stephan?) and is actively seeking to covet and de facto does covet property belonging to others via trickery and deceit and therefore is engaging in fraud, the way I think you have defined the term.”

I fail to see what this has to do at all with the contention that FRB even in anarchotopia is fraudulent.

Paul Edwards July 18, 2006 at 3:56 pm

Stephan,

“Or, if A is misrepresenting to B the nature of the money he is paying B.”

…

“B knows what this is: it is a piece of the money currently in circulation.”

But what does it mean to possibly misrepresent “the nature” of the money A is paying B? And what, precisely, does B know? It is a piece of the money currently in circulation; but what is this? The presupposition in your statements is that there are many ways to understand money and that if one accurately represents it in a certain manner, no matter how different this “money” is to the praxeological meaning of money, then all is on the up and up. However, there is no legitimate re-definition of money to be had from that of the Misesian definition elaborated in the money regression. It is either this money or it has necessarily been misrepresented by someone to someone else.

For instance, in a gold coin economy, gold coin is the money. Gold certificates are titles to ownership of this money; they are warehouse receipts. Some of us think that money is whatever we wish to say it is and agree that it is, that we can write contracts and make disclosures and agree that a promise to pay gold in two years is money or that a duplicate claim to the same gold coin is money, or that a bill of goods is money, or that a collection of commodities or an index could form the basis for money, all concurrently with this gold coin money or else exclusive of gold coins. This is all entirely false.

When a person is presented with something that appears to be money, he implicitly takes it to be the money of the Misesian, praxeological sense, not in the sense that the fine print declares and the agreement that is made between the banker and his customers. Money must of necessity be a present good, chosen originally via the barter market, and available now in the present, without strings attached and inaccessible due to possible contingencies of third parties; “This is good money unless otherwise decided by your friendly third party banker at any time”. This is simply not money and this is necessarily not what people think they are accepting when they take money.

I am not arguing that the depositor or borrower has been defrauded. I am arguing that the general population in the economy who accept these false claims to money are defrauded. To the extent that the banking customers completely understand the nature of the contract they have involved themselves in with the banks, they are also participants.

Also, all of my arguments presume no central bank, no deposit insurance, and no legal tender laws. Just free banks who might want to do some profitable FR banking.

Juan Fernando Carpio July 18, 2006 at 4:03 pm

Stephan:

The law of identity is relevant because in order to define fraud you need to know who is promising something (and what) to whom on a contractual basis. FR is not fraud perse, if commited on credit, it is mainly theft. If commited on a deposit it can be both.

On:

“I don’t care waht the natuer of the “deposit” is–whether the economist wants to calssify it as deposit or credit.”

There lies the mistake, and it is not small. The difference is not for the economist (first) it is for the lawyer/jurist. It is very different to engage in credit than in making a deposit (think of a storage room). Recognizing there is a point (the main point, as a matter of fact) in the contract type, will then allow you/us to state if there is fraud or just theft. Credit is a non-100% reserve operation (of course!), so FR is not fraud, per se. A deposit IS, ALWAYS, a 100% reserve operation (of course!), so theft and fraud apply in different ways depending on the kind of contract. In one you are the lender (asuming risk) in the other you are the customer of a vault (avoiding risk, paying NOT to incurr in it).

The difference is of legal nature, not (only) economic.

Stephan Kinsella July 18, 2006 at 4:07 pm

Note that Rothbard here says (p. 27):

The dire economic effects of fractional bank money will be explored in the next chapter. Here we conclude that, morally, such banking would have no more right to exist in a truly free market than any other form of implicit theft. It is true that the note or deposit does not actually say on its face that the warehouse guarantees to keep a full backing of gold on hand at all times. But the bank does promise to redeem on demand, and so when it issues any fake receipts, it is already committing fraud, since it immediately becomes impossible for the bank to keep its pledge and redeem all of its notes and deposits. [15] Fraud, therefore, is immediately being committed when the act of issuing pseudo-receipts takes place.

I think the problem here is that if the consumer is aware that the bank is lending out the money, then the consumer knows there is a chance the deposit can’t be redeemed.

Note also: R is here a bit unclear on what the act of fraud is: it is loaning out the deposited money? No, apparently not; the act of fraud taks place when a pseudo-receipt is issued. Why? Because it used this receipt to get the depositor’s gold. It claimed that it’s a “redeeom on demand” ticket, but it’s really not.

I am with R so far on this (and the Austrian proponents of “freebanking” think R is wrong because it is NOT impossible to redeem on demand; but I think R is right). I think basically, my position is: the ticket is not a demand ticket, even if it’s called that. Why? Because the bank makes it clear (by paying interest) that it is going to loan the money out; and economics shows that if this is the case, it can’t be redeeemable on demand.

Therefore, to my mind, it’s as if you give the bank gold, and they give you a ticket stamped “redeemable on demand; but maybe not, since it’s loaned out”. So you have a sort of confused statement there. The point is, this is a *legal* question; here, we look at parties’ intent. We have to construe the intentions and meaning. I would say that since both sides knew the money would be lent out, then it’s just not really a demand instrument, so since the depositor knows this, he is not really defrauded.

Maybe this is our disagreement. I have stated that I think in a free society, after the first freebank goes belly up and is sued for fraud/conversion and loses, then all of them will immediately adopt the disclaimers. I guess that means they won’t “really” *guarantee* to redeem on demand. Maybe the Austrians here would now classify this as credit. Okay by me.

Stephan Kinsella July 18, 2006 at 4:18 pm

Paul E:

Stephan,

“But what does it mean to possibly misrepresent “the nature” of the money A is paying B? And what, precisely, does B know?”

I means that B wants a “genuine” piece of currency–one printed by the feds (or some bank), not one I counterfeited. So if I counterfeit one myself and tell B it is not counterfeited, I am defrauding him by giving him something other than what I am representing.

“It is a piece of the money currently in circulation; but what is this? The presupposition in your statements is that there are many ways to understand money and that if one accurately represents it in a certain manner, no matter how different this “money” is to the praxeological meaning of money, then all is on the up and up. However, there is no legitimate re-definition of money to be had from that of the Misesian definition elaborated in the money regression. It is either this money or it has necessarily been misrepresented by someone to someone else.”

I find this all beside the point. Paul if I pay you tomorrow $50 for your used iPod, then you and I are both aware of what I am giving you in payment, and you are not defrauded. Can you seriously maintain you are defrauded?

“For instance, in a gold coin economy, gold coin is the money. Gold certificates are titles to ownership of this money; they are warehouse receipts.”

Of course.

“Some of us think that money is whatever we wish to say it is and agree that it is, that we can write contracts and make disclosures and agree that a promise to pay gold in two years is money or that a duplicate claim to the same gold coin is money, or that a bill of goods is money, or that a collection of commodities or an index could form the basis for money, all concurrently with this gold coin money or else exclusive of gold coins.”

No. It is that I do not CARE whether it is really money or not; or whether the “deposit” is “really” a deposit, or “merely” a loan or investment. I don’t care how the economists classify it. The legal idea of theft and fraud apply to any exchanges, not just those involving money. So the question is: if A hands a *thing* to B and B accepts that *thing* in exchange for some good or service, there is no fraud done by A, if A is not misrepresting *what that thing is*.

Likewise, when someone deposits money wtih a bank, and is aware the bank will lend it out; and is therefore aware he may not get it back, then he is not defrauded, and no theft is committed when the bank loans it out. Classify the “deposit” however you want, it is beside the point.

“When a person is presented with something that appears to be money, he implicitly takes it to be the money of the Misesian, praxeological sense, not in the sense that the fine print declares and the agreement that is made between the banker and his customers. Money must of necessity be a present good, chosen originally via the barter market, and available now in the present, without strings attached and inaccessible due to possible contingencies of third parties; “This is good money unless otherwise decided by your friendly third party banker at any time”. This is simply not money and this is necessarily not what people think they are accepting when they take money.”

You are losing me. Are you talking about mere exchanges where people spend money? Do you seriously maintain that every day, every time someone spends money, they are defrauding their vendor? Hey, I’ll tell you what, feel free to defraud me all you want, with all of yoru fake money.

“I am not arguing that the depositor or borrower has been defrauded. I am arguing that the general population in the economy who accept these false claims to money are defrauded.”

? By … whom? By people who pay money to them?

“To the extent that the banking customers completely understand the nature of the contract they have involved themselves in with the banks, they are also participants.”

So… since we Austrians are the only ones who really realize that the money we use today is bogus, then we are defrauding normal people when we buy things, but everyone else is innocent?

Juan: “The law of identity is relevant because in order to define fraud you need to know who is promising something (and what) to whom on a contractual basis. FR is not fraud perse, if commited on credit, it is mainly theft. If commited on a deposit it can be both.”

Are you saying FR is okay because what is really being given is credit?

NSK: “I don’t care waht the natuer of the “deposit” is–whether the economist wants to calssify it as deposit or credit.”

J: “There lies the mistake, and it is not small. The difference is not for the economist (first) it is for the lawyer/jurist. It is very different to engage in credit than in making a deposit (think of a storage room).”

Fine. Call it credit if you want.

“Recognizing there is a point (the main point, as a matter of fact) in the contract type, will then allow you/us to state if there is fraud or just theft. Credit is a non-100% reserve operation (of course!), so FR is not fraud, per se. A deposit IS, ALWAYS, a 100% reserve operation (of course!), so theft and fraud apply in different ways depending on the kind of contract.”

Okay. Then what is being done is of course not a deposit. So where is the fraud?

“In one you are the lender (asuming risk) in the other you are the customer of a vault (avoiding risk, paying NOT to incurr in it).”

Yes yes yes, as an opponent of FRB I know all this. “Depositers” in FRB don’t pay, but they get interest. So sure, yes, I guess they are really lenders, or maybe investors. This is my point. Just because the magic word “deposit” is used does not make it so.

Juan Fernando Carpio July 18, 2006 at 4:33 pm

Stephan:

Now that the difference between deposit and credit (investing, as you correctly put it) has been aknowledged, and deposits have been set aside for the moment, we can get to the point.

You ask “So where is the fraud?”, in credit. Well, I can say that I will invest 80% of your money in low-risk investments (you see a brochure or the contract fine print) and pay me 5% of interest, but something goes wrong and I don’t steal your money but do use 30% instead of 20% for higher risk operations. Is that theft or fraud? Is misuse of property without consent, fraud?

Stephan Kinsella July 18, 2006 at 4:40 pm

Juan: “Now that the difference between deposit and credit (investing, as you correctly put it) has been aknowledged, and deposits have been set aside for the moment, we can get to the point.”

About time. and I never denied this; I said from the outset I’m persuaded by the case made by the anti-fidiciarists.

“You ask “So where is the fraud?”, in credit. Well, I can say that I will invest 80% of your money in low-risk investments (you see a brochure or the contract fine print) and pay me 5% of interest, but something goes wrong and I don’t steal your money but do use 30% instead of 20% for higher risk operations. Is that theft or fraud?”

I’d call it conversion, a type of theft.

“Is misuse of property without consent, fraud?”

No. And this basically proves my point: the “depositor” is perfectly okay w/ the FRB lending out his money. So it’s not conversion/theft, is it?

Juan Fernando Carpio July 18, 2006 at 5:13 pm

Stephan:

The problem is that not only you can misuse people’s property in credit. The 100% reserve case is for checking accounts (deposits), and that is from where most of fiat money comes from.

If promising only 20% of relatively risky investments in a portfolio and not complying is not fraud, what could be? Please give me an example in banking so we can work from there.

Stephan Kinsella July 18, 2006 at 5:17 pm

Carpio carps: “The problem is that not only you can misuse people’s property in credit. The 100% reserve case is for checking accounts (deposits), and that is from where most of fiat money comes from.”

Okay. I see no fraud.

“If promising only 20% of relatively risky investments in a portfolio and not complying is not fraud, what could be? Please give me an example in banking so we can work from there.”

Not sure what you are saying or asking. Fraud is when you make a misrepresentation to get someone’s property under false pretenses. If this is a case of it, it is; if not, not. Either it is, or it’s not.

Juan Fernando Carpio July 18, 2006 at 5:36 pm

Stephan:

Glad I have the concept on fraud right.

Then all deposit contracts that are not honored (by having 100% reserves at all time) and all credit deposits that deviate from the rules of investment, are fraud.

You were contractually told that a) your money or other good were convertible (like dollars representing quantities of silver, which used to happen) on the spot, or b) the use was A but it was used unconsultedly in way B, respectively, so we have a case of fraud.

On the other hand, if a dollar is a paper that only has a politician face on it, it is not fraud. It is just theft, via inflation and legal tender. One can always save in euros, yens or gold, but the monetary function as such (the most marketable /liquid good as money) is confiscated. Confiscation…

Greetings,

Stephan Kinsella July 18, 2006 at 5:43 pm

Juan, “Then all deposit contracts that are not honored (by having 100% reserves at all time) and all credit deposits that deviate from the rules of investment, are fraud.”

As we have all agreed, in the case of FRB it is not a deposit contract in the 100% reserve sense, is it?

“You were contractually told that a) your money or other good were convertible (like dollars representing quantities of silver, which used to happen) on the spot, or b) the use was A but it was used unconsultedly in way B, respectively, so we have a case of fraud.”

No, I think by its nature an FRB cannot guarantee to repay you and it is known that it will lend your money out. So you are not defrauded.

Juan Fernando Carpio July 18, 2006 at 5:59 pm

Stephan:

Yes we have totally agreed that those are not deposits, de facto.

The big problem is, that checking accounts and others are sold to us AS IF they were deposits, and they were/are so, de jure. There is were I see fraud. I you just knew you were investing (lending) then it would just be a matter of more or less information (although I would insist on fraud existing if fine lines are explicit and violated, but that doesn’t to be the subject at all here) in general.

I think, to add something of value once again, that the reason banks do not make the difference you and I have made, clear, is because they currently profit from blundering the distinction.

All the best,

Stephan Kinsella July 18, 2006 at 7:21 pm

Juan: “Yes we have totally agreed that those are not deposits, de facto.

The big problem is, that checking accounts and others are sold to us AS IF they were deposits, and they were/are so, de jure. There is were I see fraud.”

I just disagree with this part. The depositor is aware it’s a FRB. That’s enough for me to say caveat emptor. I really doubt, BTW, FRBs would be silly enough to say it’s a 100%-reserve-type requirement, anyway.

Manuel Lora July 18, 2006 at 7:23 pm

So, then, after all these posts, there seems to have been some progress made. That is, that since in FRB those “deposits” are not really deposits to begin with, then it’s not fraud.

In a way, it’s a matter of thinking of fractional reserve banking as not really being “banking” (as in a vault or storage place) but rather an investment firm that in today’s societies are called “banks.”

Paul Edwards July 18, 2006 at 7:50 pm

Hi Stephan,

In general, some of the disconnect between us is that I am speaking about free banking with no FDIC, no FED, and no legal tender laws, but where FR banking is under question, under some form of commodity money with commodity money substitutes. I think we can discuss the issue most clearly and effectively if we both presume this simpler situation.

Paul: “But what does it mean to possibly misrepresent “the nature” of the money A is paying B? And what, precisely, does B know?”

“I means that B wants a “genuine” piece of currency–one printed by the feds (or some bank), not one I counterfeited. So if I counterfeit one myself and tell B it is not counterfeited, I am defrauding him by giving him something other than what I am representing.”

Yes, B could quite logically expect that if the note is printed by some bank that it is “genuine”, and that it therefore represents a clear title to money, when in fact it would be a duplicate claim to money and not clear title at all. Both the counterfeiting and the legitimization are done by the bank and these notes are passed on to the borrower, which are passed on to B. B mistakenly thinks the notes are genuine. My point is that they are not.

Paul: “It is a piece of the money currently in circulation; but what is this? The presupposition in your statements is that there are many ways to understand money and that if one accurately represents it in a certain manner, no matter how different this “money” is to the praxeological meaning of money, then all is on the up and up. However, there is no legitimate re-definition of money to be had from that of the Misesian definition elaborated in the money regression. It is either this money or it has necessarily been misrepresented by someone to someone else.”

“I find this all beside the point. Paul if I pay you tomorrow $50 for your used iPod, then you and I are both aware of what I am giving you in payment, and you are not defrauded. Can you seriously maintain you are defrauded?”

You find this beside the point and I consider it to be THE point. So let’s go back to a point in time where we are on a gold coin money standard and banks are issuing 100% backed warehouse receipts to money and these are being used commonly as money substitutes. Now say you pay me tomorrow with a 1/10th ounce gold certificate, but in this case, with fine print on it which reads like this: “This certificate may be good for 1/10th ounce of gold, or it may be worthless”. Do you think I am going to accept your note if I understand the stipulation? Let’s presume I’m not nuts or stupid and that I will not. Just what do you think it would take for me and others to widely accept notes that effectively come with such a stipulation? Here’s what it would take: a misrepresentation. Fraud. You may claim people are stupid for accepting such notes with a clear understanding of their nature. I claim they are not that stupid.

Paul: “For instance, in a gold coin economy, gold coin is the money. Gold certificates are titles to ownership of this money; they are warehouse receipts.”

Of course.

Paul: “Some of us think that money is whatever we wish to say it is and agree that it is, that we can write contracts and make disclosures and agree that a promise to pay gold in two years is money or that a duplicate claim to the same gold coin is money, or that a bill of goods is money, or that a collection of commodities or an index could form the basis for money, all concurrently with this gold coin money or else exclusive of gold coins.”

“No. It is that I do not CARE whether it is really money or not; or whether the “deposit” is “really” a deposit, or “merely” a loan or investment. I don’t care how the economists classify it. The legal idea of theft and fraud apply to any exchanges, not just those involving money. So the question is: if A hands a *thing* to B and B accepts that *thing* in exchange for some good or service, there is no fraud done by A, if A is not misrepresting *what that thing is*.”

But to accurately represent a duplicate title to the same money is to explicitly point to it as a potentially and very likely worthless note, depending on which claimant redeems the note first. It will not be accepted as money if its true character is revealed and understood, and to the extent that it is accepted as money, there simply must be a fraudulent misrepresentation in play.

“Likewise, when someone deposits money wtih a bank, and is aware the bank will lend it out; and is therefore aware he may not get it back, then he is not defrauded, and no theft is committed when the bank loans it out. Classify the “deposit” however you want, it is beside the point.”

I don’t need to show that the depositor is defrauded to show that FR banking is fraudulent. Those who are paid with FR notes are defrauded.

Paul: “When a person is presented with something that appears to be money, he implicitly takes it to be the money of the Misesian, praxeological sense, not in the sense that the fine print declares and the agreement that is made between the banker and his customers. Money must of necessity be a present good, chosen originally via the barter market, and available now in the present, without strings attached and inaccessible due to possible contingencies of third parties; “This is good money unless otherwise decided by your friendly third party banker at any time”. This is simply not money and this is necessarily not what people think they are accepting when they take money.”

“You are losing me. Are you talking about mere exchanges where people spend money? Do you seriously maintain that every day, every time someone spends money, they are defrauding their vendor? Hey, I’ll tell you what, feel free to defraud me all you want, with all of yoru fake money.”

LOL. Nope. Let’s stay away from today’s monetary situation because we are all constrained by legal tender laws and other forms of government aggression forcing us all to live with Federal Reserve money. The question you and I are hammering at is unnecessarily complicated by consideration of today’s monetary system.

Paul: “I am not arguing that the depositor or borrower has been defrauded. I am arguing that the general population in the economy who accept these false claims to money are defrauded.”

“? By … whom? By people who pay money to them?”

By the banks fundamentally, and also by the borrowers and depositors to the extent that they understand that duplicate titles to the same money have been issued through the FR banking process that they are participating in. And I am talking about a free banking scenario, not today’s Federal Reserve scenario.

Paul: “To the extent that the banking customers completely understand the nature of the contract they have involved themselves in with the banks, they are also participants.”

“So… since we Austrians are the only ones who really realize that the money we use today is bogus, then we are defrauding normal people when we buy things, but everyone else is innocent?”

Pretty silly argument huh? But no. However, I think we are now back on the same page again, based on my comments above and so you realize that this is not what I am saying.

Stephan Kinsella July 18, 2006 at 8:48 pm

Paul E:

“In general, some of the disconnect between us is that I am speaking about free banking with no FDIC, no FED, and no legal tender laws, but where FR banking is under question, under some form of commodity money with commodity money substitutes. I think we can discuss the issue most clearly and effectively if we both presume this simpler situation.”

yes; what happened was some of the opponents of FR and who maintained it is fraud pointed to the state’s role in today’s system. Let’s focus on the clear case.

“Yes, B could quite logically expect that if the note is printed by some bank that it is “genuine”, and that it therefore represents a clear title to money,”

No; by “genuine” I mean that it is what it is claimed to be–notes printed by a given source, and not forged by me.

” when in fact it would be a duplicate claim to money and not clear title at all. Both the counterfeiting and the legitimization are done by the bank and these notes are passed on to the borrower, which are passed on to B. B mistakenly thinks the notes are genuine. My point is that they are not.”

So who is doing the defrauding, in your theory, if A pays B in fidiciary notes? A? B?

“You find this beside the point and I consider it to be THE point. So let’s go back to a point in time where we are on a gold coin money standard and banks are issuing 100% backed warehouse receipts to money and these are being used commonly as money substitutes. Now say you pay me tomorrow with a 1/10th ounce gold certificate, but in this case, with fine print on it which reads like this: “This certificate may be good for 1/10th ounce of gold, or it may be worthless”. Do you think I am going to accept your note if I understand the stipulation?”

I don’t know. The quesiton is, if you do, is it fraud?

” Let’s presume I’m not nuts or stupid and that I will not. Just what do you think it would take for me and others to widely accept notes that effectively come with such a stipulation? Here’s what it would take: a misrepresentation. Fraud.”

Well, This may be . I don’t know. The question is, is it *necessarily fraud* to have a fractional reserve bank? I say no. If you can show fraud is commmitted in any particular point, okay, fine. But it’s not necesary.

The FRB might say, “hey, put your money here, you get interest, AND we promise to (try to) redeem your money just like at the warehouse down the road that costs you money. We can’t guarantee it, but our theory of banking says we have very high chance of being able to.” Could they succeed? Maybe at first they just loan out 1% and in exchange they waive the warehousing fees. Maybe the notes are accepted grudgingly as payment, and then start to circulate. As long as there is no misrepresntation about whether they are really warehouse receipts, I see no problem whatsoever. And I see no reason to assume that there *has to be* such misrepresentation, necessarily. You seem to assume this. NO?

” You may claim people are stupid for accepting such notes with a clear understanding of their nature. I claim they are not that stupid.”

No; I was talking mainly about depositors. If you are dumb enough to hand over your gold to someone without understanding what your rights are and what they are doing with it, too bad, so sad. Now if the FRB promises you they are *warehousing it*, and they don’t, okay, then we have a problem. I don’t think, however, FRB necessarily entails *lying about* what they are doing with the money. My sole claim has been that if it is known what the nature of the FRB is, then it is not fraud, b/c the customer who gives them money is on notice.

Now if the customer then pawns these notes off and pretends they are warehouse receipts, I guess he is committing fraud too; but I would think that in any society word would get around as to the nature of these special, new notes. And if people want to accept them, it’s then at their risk. I really see no problem at all here.

“But to accurately represent a duplicate title to the same money is to explicitly point to it as a potentially and very likely worthless note, depending on which claimant redeems the note first.”

I don’t think it is a duplicate title. It’s a claim to get money from the bank if the bank has it.

“I don’t need to show that the depositor is defrauded to show that FR banking is fraudulent. Those who are paid with FR notes are defrauded.”

? By the bank? By the person paying? But then the recipient of these notes wants them–why? To pay others. So he instantly becomes an accomplice, by this theory, and has unclean hands, and no complaint, right?

“By the banks fundamentally,”

But… the bank gives a note to its customer. Not to the customer’s payees. Why is the bank responsible for what the customer does with it? Why is the bank responsible if some idiot third party accepts the notes without realizing that they are different than warehouose receipts?

” and also by the borrowers and depositors to the extent that they understand that duplicate titles to the same money have been issued through the FR banking process that they are participating in.”

I am not really sure a duplicate title is possible.

Paul: “To the extent that the banking customers completely understand the nature of the contract they have involved themselves in with the banks, they are also participants.”

NSK: “So… since we Austrians are the only ones who really realize that the money we use today is bogus, then we are defrauding normal people when we buy things, but everyone else is innocent?”

Paul: “Pretty silly argument huh? But no.”

I thought not. But this is an immplication. Unless you are saying everyone who passes such notes, no moatter how igonrant they are, is a defrauder. I pay you $100; you turn around and pay the shoe man; he pays the grocer; we are all just defrauding each other. I find this notion just ridiculous. That it not what law is for: to protect a bunch of economically ignorant idiots playing monopoly money games with themselves from their own stupidity.

JIMB July 18, 2006 at 9:17 pm

Stephan – You’ve got to try on the coat to see if it fits not just look at it and presume you know. For a discourse with potential common ground to have benefit, you’ve got to see how things (such as the arguments above) can be true. Frankly, language cannot communicate to you if you fail to adopt the writer’s point of view long enough to understand what is being said.

Fraud is misrepresentation (of which you’ve been given many examples) – in this case intentionally causing some people to accept lower-than-normal wages and yields UNKNOWN to them until later when other prices adjust.

Curt Howland July 18, 2006 at 9:23 pm

Mr. Kinsella, I find your article above very interesting. When I have in the past labeled “fraud” to the use of someone else’s name in order to leverage their reputation for gain, you have said I used the word wrong.

Yet in your article, you use the example of using the word “apples” in order to leverage a buyer into thinking they were getting something they weren’t, specifically apples fit for eating, and this time it’s a crime because the buyer isn’t getting what they think they were paying for.

Yet when it is an intangible, a miss-labeled book, a miss-labeled TV, the use of a company name or person’s name on an object falsely in order to capitalize on that reputation, you have consistently argued that it is not “fraud”, that it is not “theft”, that since the third party has no ownership of their “reputation” they cannot claim that they are harmed because someone uses that “reputation” by lying. When I call it “fraud” you say I am using it wrong.

I believe I am the one here being consistant. If it is fraud to say this these are apples fit for eating when they are not, it is also fraud to say this is a Sony TV when it is not. It is fraud to say it is a MacDonald’s restaurant, in order to leverage the reputation for fast food (regardless of one’s personal opinion of that reputation) if it is actually not a MacDonald’s restaurant.

I agree with you that just lying isn’t always a crime of fraud, any more than walking is always a crime of trespassing. That is what juries are for.

Curt Howland July 18, 2006 at 9:31 pm

On Fractional Reserve Banking, what’s the problem?

As long as there is no representation that one’s deposits are being retained absolutely, there is no fraud.

Under a real free-market, I expect I would be able to put my money in an account specifically contracted as either 100% reserved, earning maybe no interest other than the utility of safe keeping. I might also put my money in an account specifying 50% reserve with the 50% remaining available within 120 days of receipt of withdrawl request, but this time it earns interest.

The “fraud” of fractional reserve banking is that it is not done openly, with depositors knowing what is being done with their money. However, looking back at even such children’s fare as _Marry Poppins_, the bankers at the end who are trying to get their paws on the children’s two pence are telling them _up front_ that those pence will in fact be loaned out if they are deposited.

Combine the “open secret” of fractional reserve with the Federal Deposit Insurance scam, and that becomes a very serious license to make money with little or no repercussions for making bad loans. So maybe the source of the “problem” is government intervention …again!

Stephan Kinsella July 18, 2006 at 10:18 pm

JIMB: “Stephan – You’ve got to try on the coat to see if it fits not just look at it and presume you know. For a discourse with potential common ground to have benefit, you’ve got to see how things (such as the arguments above) can be true. Frankly, language cannot communicate to you if you fail to adopt the writer’s point of view long enough to understand what is being said.”

I am not sure what you are saying. Is this supposed to demonstrate that FRB is necessarily fraudulent?

Curt: “When I have in the past labeled “fraud” to the use of someone else’s name in order to leverage their reputation for gain, you have said I used the word wrong.”

Give an example, please, of exactly what case of this you would maintain is fraud.

“Yet when it is an intangible, a miss-labeled book, a miss-labeled TV, the use of a company name or person’s name on an object falsely in order to capitalize on that reputation, you have consistently argued that it is not “fraud”,”

YOu have to show that this is actually some kind of misreprentation that caused the owner to give you the property under false pretenses, something like that. Can you provide one simple concrete example that you think is the clearest, best, easiest case of fraud in this respect? Please be very clear. I will then pronounce on whether it is fraud or not.

“If it is fraud to say this these are apples fit for eating when they are not, it is also fraud to say this is a Sony TV when it is not.”

Of course. Did you read my Against Intellectual Property article (re trademarks), or the comments above about my interchange w/ Van Dun about trademarks? Are you aware that this *is* my theory of how some form of TM can be justified–? that the person who sells a Sony when it is really not, has defrauded his customer? I actually agree that this could be a form of fraud. But if you try to make a similar argument re reputation rights (in general), you’ll see (I believe) that you cannot actually connect it up.

“It is fraud to say it is a MacDonald’s restaurant, in order to leverage the reputation for fast food (regardless of one’s personal opinion of that reputation) if it is actually not a MacDonald’s restaurant.”

Sure. Unless the buyer’s realize it’s a fake-Mickey D’s. If they konw you’re a knockoff, there’s no fraud.

“I agree with you that just lying isn’t always a crime of fraud, any more than walking is always a crime of trespassing. That is what juries are for.”

Er, yes. And principles.

“As long as there is no representation that one’s deposits are being retained absolutely, there is no fraud.”

Yes, this is my oint. And even if this representation is being made, still, it’s contrary to the nature of what is going on and any depositor should well know this.

“The “fraud” of fractional reserve banking is that it is not done openly, with depositors knowing what is being done with their money.”

Um. We are talking about a private freebanking system in anarchotopia. How do you know that it “is” not done openly?

Mike Sproul July 18, 2006 at 11:08 pm

Stephan:

Fractional reserve banking is neither fraudulent nor inflationary nor economic nonsense. A bank first accepts 100 paper dollars on deposit, for which it issues 100 checking account dollars. Then it lends 200 checking account dollars to a farmer who offers his IOU (worth $200 and backed by his farm). The additional $200 is adequately backed by the $200 IOU, so it causes no inflation. Even if all $300 checking account dollars are presented to the bank at once for payment in paper dollars, the bank can either sell the $200 IOU for $200 in paper, or sell the $200 IOU for $200 of its own checking account dollars, or hand the IOU itself over to the holders of checking account dollars. As long as customers agree to the arrangement before accepting checking account dollars, there is no fraud and no nonsense.

See my paper “There’s No Such Thing as Fiat Money”
http://www.geocities.com/sproulmike/nofiatmoney.doc

Stephan Kinsella July 18, 2006 at 11:50 pm

Mike Sproul: “Fractional reserve banking is neither fraudulent nor inflationary nor economic nonsense. A bank first accepts 100 paper dollars on deposit, for which it issues 100 checking account dollars. ….”

Um, I think the idea is that in a private society we would have, say, gold money. Ther are no paper dollars. First there is real money, e.g. gold. Then paper banknotes that are basically claims to actual gold stored in the bank could circulate and become popular. FRB would occur when you give a FRB your gold and they give you a note with a right to redeem that much gold, and they then loan out some of your gold to others.

It is nonsense, in my view, because it is an attempt to get something for nothing; it conflates wealth with money; and it presupposes some non-existent problem (stickiness of wages etc.) that has to be “solved” by fidiciary media.

Nonsense though it may be, I don’t see that it’s fraud.

I would refer you to papers on this by Huelsmann, Hoppe, et al. for a cogent explanation of what is wrong with the notion of FRB being economically viable, sound, or needed.

Brent Nelson July 19, 2006 at 12:05 am

Stephan, I admire your persistence in replying to questions here. I think I’ve got the gist:

  • A private counterfeiter is committing fraud, because he is representing his note as something it is not.
  • The fact that a bank pays interest should be used as an indication that the bank has a fractional reserve.
  • A known fractional reserve bank isn’t committing fraud at the moment it accepts deposits or makes loans.
  • If the fractional reserve bank cannot make good on a withdrawal, at that point it is committing a form of theft, but not fraud.
  • The fractional reserve banker looks a lot like a private counterfeiter. He prints some notes that are backed by currency. He prints some more notes that are not at the moment backed. The difference is that the counterfeiter never intends to back the notes, the banker does. So in the event that there is a run on the bank and some notes cannot be redeemed, the banker is guilty of theft. But he is not committing fraud.
  • In the case of a bank charging for bailment and issuing warehouse receipts (if I’m using those terms correctly), the assumption would be that it has 100% reserve.
  • If a known 100% reserve bank issues additional, unbacked warehouse receipts, it would be committing fraud.

JIMB July 19, 2006 at 12:11 am

Stephan – So try on the coat: Fraud is misrepresentation – in this case intentionally causing some people to accept lower-than-normal wages and yields UNKNOWN to them until later when other prices adjust.

Simple.

Paul Edwards July 19, 2006 at 2:32 am

Stephan,

I’ll give your arguments some thought.

Thanks for the discussion.

Artisan July 19, 2006 at 4:07 am

Mr Nelson

“The fact that a bank pays interest should be used as an indication that the bank has a fractional reserve.”

I guess you’re speaking about day account interest rate, which are quite low anyways.
Do you mean they are NECESSARILY tied to FRB?

If interest rates can be seen as the price paid for swapping high against low time preference, then those daily IR are something paid for an almost zero duration switch between high and low time preference… still it’s worth something isn’t it?

I’d also say FRB is a fraud, yet not so much because it’s not telling you that all money cannot physically simultaneously redeemed w/o lowering the value of the bills.

In my opinion, FRB is more a fraud because Government/bankers deceive people into the believe that the value of money is naturally decreasing, and they’re really doing everything they can to secure inflation at 2% a year pace (which they say is practically NOTHING while healthy!). The more I read about the financial mechanisms, the more this sounds like lies.

Curt Howland July 19, 2006 at 5:31 am

Mr. Kinsella, “Are you aware that this *is* my theory of how some form of TM can be justified–?”

What I find amazing is that I have been consistant in this and you have repeatedly disagreed with me. Now you state that what I’ve been saying all along is just restating your theory on a justification for trade mark. I’m in awe.

“Can you provide one simple concrete example that you think is the clearest, best, easiest case of fraud in this respect?”

How about the three I gave, including your own example of selling apples? Are they (including yours) still insufficient to exemplify a deliberate lie in order to leverage some third party’s reputation (apples, Sony, MacDonald’s)?

“How do you know that it “is” not done openly?”

I’m sorry, Mr. Kinsella, do you actually read what I write? Not only did I state clearly the example that in an honest banking situation maintaining a fractional reserve works just fine so long as depositors have no expectation of 100% reserve, I also gave the example of _Mary Poppins_ where the bankers tell the children up front that their money will be loaned out and therefore not be kept in 100% reserve.

I have long had the impression that you and I just don’t get along. It has nothing to do with principles, we agree on every substantive practical point, but something about how I use the English language causes you to respond in such a way (I of course cannot know how you feel since I am not a mind reader) that frustrates me utterly. What I read of your words informs me that the frustration is mutual, since I cannot write in agreement with you without your reply being one of contradiction and challenge.

Artisan, the central bankers, pet economists, politicians and bureaucrats are certainly aware of what inflation is, and they indeed deserve to be held accountable for the fraud of their deliberate efforts at misdirection and cover-up of their own duplicity by talking about “reining in the inflation monster” as if it were something they were saving us from.

Stephan Kinsella July 19, 2006 at 7:54 am

Brent:

“Stephan, I admire your persistence in replying to questions here.”

Hey, no problem. There are some really thick-headed people out there, no? (Just kiddding.)

>* A private counterfeiter is committing fraud, because he is representing his note as something it is not.< Ja.

>* The fact that a bank pays interest should be used as an indication that the bank has a fractional reserve.< Sure; but I would also think that this very fact would be somehow advertized by the bank.

>* A known fractional reserve bank isn’t committing fraud at the moment it accepts deposits or makes loans.< Right.

>* If the fractional reserve bank cannot make good on a withdrawal, at that point it is committing a form of theft, but not fraud.< No. It is not committing theft at all. If it cannot make good on a contractual agreement to pay, there is nothing to steal. I have explained this in my article on Contract Theory, and in other places. And in this case, due to the impossible nature of FRB actually working, I’d say the FRB has a defense from the outset to any claim of theft, since the depositor should hvae known he was agreeing to something that could never be done.

>* The fractional reserve banker looks a lot like a private counterfeiter. He prints some notes that are backed by currency.< No; let’s talk about the private FRB. He prints notes based on gold deposits, but the notes are not 100% backed by the gold. If that is clear from the nature of the note, there is no counterfeiting and no fraud.

> He prints some more notes that are not at the moment backed. The difference is that the counterfeiter never intends to back the notes, the banker does. So in the event that there is a run on the bank and some notes cannot be redeemed, the banker is guilty of theft. But he is not committing fraud.< Again–no theft. How can you steal that which does not exist?

>* In the case of a bank charging for bailment and issuing warehouse receipts (if I’m using those terms correctly), the assumption would be that it has 100% reserve.< Probably; but why would the 100% reservebank leave it up to assumption? They would advertize this fact. In fact I suppose in competition w/ FRBs the 100% reserve banks would tend to adopt some kind of little notice or seal of “100% backed” etc., to distinguish themselves; and the FRBs would not truthfully be able to adopt this seal. So people might start eyeing notes passed to them for this mark. Etc. Yet another reason FRB probably would fail from the outset.

>* If a known 100% reserve bank issues additional, unbacked warehouse receipts, it would be committing fraud.< Well. Depends on exactly how it is done, but not sure if it’s fraud, or if it’s theft. Say a depositor puts in gold and gets a warehouse receipt. This is not fraud. Later the bank loans out 90% of the gold. This is not fraud–it is conversion, or appropration of someone else’s propety (a type of theft).

>Stephan – So try on the coat: Fraud is misrepresentation – in this case intentionally causing some people to accept lower-than-normal wages and yields UNKNOWN to them until later when other prices adjust.< Yeah, I just don’t see it.

Paul: >I’ll give your arguments some thought.

Thanks for the discussion.< No problem! I think we can all agree now, that (a) I am 100% right; and (b) I am the greatest libertarian theorist living. Thank you.

Artisan: >In my opinion, FRB is more a fraud because Government/bankers deceive people into the believe that the value of money is naturally decreasing, and they’re really doing everything they can to secure inflation at 2% a year pace (which they say is practically NOTHING while healthy!). The more I read about the financial mechanisms, the more this sounds like lies.< Yeah. See. I thought I made this clear alreayd–mere lies are not fraud. Sigh. I’m losing patience with you people! Don’t make me whip out the big guns!

Stephan, I admire your persistence in replying to questions here. I think I’ve got the gist:

* A private counterfeiter is committing fraud, because he is representing his note as something it is not.
* The fact that a bank pays interest should be used as an indication that the bank has a fractional reserve.
* A known fractional reserve bank isn’t committing fraud at the moment it accepts deposits or makes loans.
* If the fractional reserve bank cannot make good on a withdrawal, at that point it is committing a form of theft, but not fraud.
* The fractional reserve banker looks a lot like a private counterfeiter. He prints some notes that are backed by currency. He prints some more notes that are not at the moment backed. The difference is that the counterfeiter never intends to back the notes, the banker does. So in the event that there is a run on the bank and some notes cannot be redeemed, the banker is guilty of theft. But he is not committing fraud.
* In the case of a bank charging for bailment and issuing warehouse receipts (if I’m using those terms correctly), the assumption would be that it has 100% reserve.
* If a known 100% reserve bank issues additional, unbacked warehouse receipts, it would be committing fraud.

Posted by Brent Nelson at July 19, 2006 12:05 AM

Stephan – So try on the coat: Fraud is misrepresentation – in this case intentionally causing some people to accept lower-than-normal wages and yields UNKNOWN to them until later when other prices adjust.

Simple.

Posted by JIMB at July 19, 2006 12:11 AM

Stephan,

I’ll give your arguments some thought.

Thanks for the discussion.

Posted by Paul Edwards at July 19, 2006 02:32 AM

Mr Nelson

“The fact that a bank pays interest should be used as an indication that the bank has a fractional reserve.”

I guess you’re speaking about day account interest rate, which are quite low anyways.
Do you mean they are NECESSARILY tied to FRB?

If interest rates can be seen as the price paid for swapping high against low time preference, then those daily IR are something paid for an almost zero duration switch between high and low time preference… still it’s worth something isn’t it?

I’d also say FRB is a fraud, yet not so much because it’s not telling you that all money cannot physically simultaneously redeemed w/o lowering the value of the bills.

In my opinion, FRB is more a fraud because Government/bankers deceive people into the believe that the value of money is naturally decreasing, and they’re really doing everything they can to secure inflation at 2% a year pace (which they say is practically NOTHING while healthy!). The more I read about the financial mechanisms, the more this sounds like lies.

Howland:

>What I find amazing is that I have been consistant in this and you have repeatedly disagreed with me.< Really? Can you show me one particular case of something you said that I disagreed with, that I now am agreeing with? Just one case. Come on.

>Now you state that what I’ve been saying all along is just restating your theory on a justification for trade mark.< No, just your latest particular comment. The rest, as I recall, were too vague or imprecisely worded or bad examples.

>I’m in awe.< Aw, shucks.

>“Can you provide one simple concrete example that you think is the clearest, best, easiest case of fraud in this respect?”

How about the three I gave, including your own example of selling apples? Are they (including yours) still insufficient to exemplify a deliberate lie in order to leverage some third party’s reputation (apples, Sony, MacDonald’s)?< Hmm, lying about apples … is a way to leverage … a third party’s reputation? Vas…? Curt, I am not sure if you are confused or not, but you sure are confusing me! :)

>I’m sorry, Mr. Kinsella, do you actually read what I write?< How would I know?

Anyway, this is not really that relevant, is it?

> Not only did I state clearly the example that in an honest banking situation maintaining a fractional reserve works just fine so long as depositors have no expectation of 100% reserve, I also gave the example of _Mary Poppins_ where the bankers tell the children up front that their money will be loaned out and therefore not be kept in 100% reserve.< Ah. You were the Mary Poppins guy. … Okay. So… Okay, what?

>I have long had the impression that you and I just don’t get along. It has nothing to do with principles, we agree on every substantive practical point, but something about how I use the English language causes you to respond in such a way < Oh, it could be that I am just refusing to agree with a vaguely or imprecisely worded statemetn. I don’tknow. Since I hardly remember which poster you are, it can’t be that we don’t get along. You seem like a perfectly sweet libertarian to me.

>(I of course cannot know how you feel since I am not a mind reader) that frustrates me utterly. < Oh, I see. I try to write precisely–if you’ll read my comments closely you’ll see I’m usually making a narrow point (when I’m not being funny). ‘k?

>What I read of your words informs me that the frustration is mutual,< ? no, not at all.

> since I cannot write in agreement with you without your reply being one of contradiction and challenge.<

Can you give me a particular example of where you believe I disagreed with something you said for trivial reasons even though I really agreed w/ the substance of it? Give me just one example, and I’ll try to show you what my reply meant.

Xellos July 19, 2006 at 8:00 am

–”Fortunately, with seller feedback and services like Paypal, issues like fraud are dealt with without the need of any government intervention.”

I would disagree. Ebay doesn’t seem to care about entire categories of fraud, because they get their auction fees from them. An example of this is anime bootleg DVDs. It is disturbingly simple to find two or four disc sets of “import” DVDs that are region zero with chinese and english subtitles (major flags for bootlegged goods). In fact, it’s actually a lot more difficult to find legitimate anime DVDs than to find bootlegs. Yet Ebay will not act on any complaints against these auctions. They get their fee, they don’t care beyond that, and sadly feedback ratings are worthless because people either a) are ignorant of the whole “if it looks too good to be true it probably is” proverb or b) don’t care cause they saved a few bucks, and give bootleggers great ratings.

And don’t get me started on Paypal…

Brent Nelson July 19, 2006 at 8:46 am

Hmm. So a fractional reserve bank is about as legitimate as a Ponzi scheme? That is, they each should technically be legal, but the participants should know by its nature that there may be a less than satisfactory outcome, so buyer beware? Harsh.

Casey Khan July 19, 2006 at 9:51 am

In furthering the Kinsella argument that FR banking is not necessarily fraud, particularly in a true free market, could we say that it is no different than when real estate property values change.

Couldn’t we have a case [assuming anarchocapitalism] where landowner Fred lets the general public know he owns a nuclear bomb on his property. Fred never threatens anyone with the bomb nor does the bomb emit any kind of radiation. Now neighbors Joe, Frank, and Tom are all pissed because market indications on their land have all now plummeted from indications prior to Fred’s nuclear announcement. It turns out Fred happens to be lying about the bomb he does not actually have. Are the neighbors a victim of Kinsella’s definition of fraud? This example clearly does not involve a rights violation as understood under the nonagression principle.

Do individuals have a ‘right’ to the subjective valuations of others in the market? No. Likewise with the case of fractional reserve banking, do individuals have a right to the current subjective market valuation of their individual money holdings when the ‘free bank’ prints more money? I guess in the case of the unknowing depositor, I can see how he may deserve to recieve back his ‘irregular deposit.’ However in the case of the knowingly agreed fractional reserve depositors, I am unconvinced they have been aggressed. They justly deserve whatever it is the market can yield them at the time they redeem the deposit.

Mike Sproul July 19, 2006 at 9:55 am

Stephan Kinsella:

“Um, I think the idea is that in a private society we would have, say, gold money. Ther are no paper dollars. First there is real money, e.g. gold. Then paper banknotes that are basically claims to actual gold stored in the bank could circulate and become popular. FRB would occur when you give a FRB your gold and they give you a note with a right to redeem that much gold, and they then loan out some of your gold to others.”

OK, so start with gold money. A bank accepts 100 oz. of gold and issues 100 paper receipts (“dollars”) in exchange. Then the bank prints 200 more paper dollars and lends them to a farmer, getting a lien on the the farm as collateral. If you’re right and the new money was inflationary, and a paper dollar ever started to trade for less than one ounce, then people would return their dollars to the bank demanding one ounce. The bank is capable of redeeming all 300 paper dollars, either by selling the IOU for 200 ounces, or by selling the IOU directly for 200 of its own paper dollars, etc. At no point in this process will the dollar drop below 1 ounce–no inflation, no fraud, and no nonsense. There is no simultaneous claim of 300 paper dollars to only 100 ounces of gold. The last 200 paper dollars are a claim to the farm. In effect, the farm has been coined into money.

Stephan Kinsella July 19, 2006 at 10:04 am

Sproul:

This thread is primarily about whether FRB is fraudulent, *even if* it is economic nonsense–not whether FRB is bad economics or not.

Now, in your example above, you are not clear on waht the “paper dollars” mean when the bank prints 200 of them and uses them to pay a farmer for a lien on his land (and a future title transfer of his gold, presumably). What is a paper dollar, exactly, in this example? Does it pretend to be a warehouse receipt to 200 oz. of gold in the bank’s vaults?

Yancey Ward July 19, 2006 at 10:24 am

I have often been puzzled that many anarcho-capitalists want fractional reserve banking in a free society to be outlawed.

Curt Howland July 19, 2006 at 11:20 am

Mr. Kinsella, “Hmm, lying about apples … is a way to leverage … a third party’s reputation? Vas…?

In your example of the apples, the buyer had an expectation that “apples” would be edible. The seller utilized this expectation, created by the buyers previous experience with prior third parties, to perpetrate the fraud that these apples _also_ were edible. It’s your example, I thought you would be aware of what you had been talking about.

“Really? Can you show me one particular case of something you said that I disagreed with, that I now am agreeing with? Just one case. Come on.”

This is what I was referring to when I said that your replies to me are loaded with contradiction and challenge.

Several months ago, I said that it was prosecutable for someone to utilize a name or other “trade mark” fraudulently. You said it was not, that there is no basis for “reputation” or trademark, that I have no basis for bringing charges against someone who knowingly and deliberately uses my name, my trademark, my production, passing it off as their own, because that person has not specifically harmed me, regardless of their abuse of others using my reputation as exemplified in your own example of selling “apples” that are inedible.

Now I read that you are claiming a Libertarian basis for trademark, directly contradicting what you said in that discussion.

I can only hope that it was something I said which changed your mind.

Mike Sproul July 19, 2006 at 11:33 am

Stephan Kinsella

“What is a paper dollar, exactly, in this example? Does it pretend to be a warehouse receipt to 200 oz. of gold in the bank’s vaults?”

A paper dollar would be a claim that is normally redeemable at the bank for 1 oz., but which everyone recognizes is backed by a mixture of silver and farmland. It’s the value of the bank’s assets that matter to the customers, not whether those assets happen to be physical silver or not. As long as all parties agree to the deal, there is no fraud, no inflation, etc.

Stephan Kinsella July 19, 2006 at 11:33 am

Howland: “Mr. Kinsella, “Hmm, lying about apples … is a way to leverage … a third party’s reputation? Vas…?

“In your example of the apples, the buyer had an expectation that “apples” would be edible. The seller utilized this expectation, created by the buyers previous experience with prior third parties, to perpetrate the fraud that these apples _also_ were edible.”

Here’s how I view it (as I’ve explained several times, and linked to a more detailed discussion of it in my contract theory article): the buyer transfers title to his payment (gold whatever) *conditional on* his “receiving (good) apples”.

So if the seller takes the gold in exchange for bad apples, the seller is now in possession of gold that the title has not transfered (b/c the condition was not triggered). so he got the money as a sort of theft-by-trick.

“It’s your example, I thought you would be aware of what you had been talking about.”

Sure.

“”Really? Can you show me one particular case of something you said that I disagreed with, that I now am agreeing with? Just one case. Come on.”

“This is what I was referring to when I said that your replies to me are loaded with contradiction and challenge.

“Several months ago, I said that it was prosecutable for someone to utilize a name or other “trade mark” fraudulently. You said it was not, that there is no basis for “reputation” or trademark, that I have no basis for bringing charges against someone who knowingly and deliberately uses my name, my trademark, my production, passing it off as their own, because that person has not specifically harmed me,”

Yes, and I stand by this. Can’t you see the differences?

First, my apple argument above has nothing to do with reputation.

Second, as i have stated many times, if a seller misrepresents the source of the goods he is selling, he may well be defrauding *his customer*. However, he is NOT “defrauding” or harming (in any libertarianly-recognizable way) the third party whose trademark he is using. For example if you sell me your own home brew beer and label it “Coors” then you are defrauding ME, but you are not defrauding or aggressing against Coors.

“Now I read that you are claiming a Libertarian basis for trademark, directly contradicting what you said in that discussion.”

NO, not at all. I think you are not seeing the distinctions that are being made here.

Curt Howland July 19, 2006 at 12:46 pm

Mr. Kinsella, “Can’t you see the differences?”

No, I cannot. Reputation is reputation is reputation. I don’t care if it’s apples, MacDonald’s, Sony or the name Stephen Kinsella. If someone uses those names, labels, pictures, references, deliberately in order to commit fraud against a buyer by leveraging their reputation, it’s all the same to me.

“I think you are not seeing the distinctions that are being made here.”

And I think the distinctions you are trying to make are arbitrary and futile. Oh, and not the least of which hellishly confusing and frustrating.

If there is any rationalization for Trademark that you agree with, you are allowing that it is reasonable for a third party not involved with the fraudulent transaction to take action. Your asserting that I may not sue, and then that there is a justification for trademark and therefore I may sue, is just impossibly confusing.

I am choosing to be confused rather than blame you for being a hypocrite. I don’t believe for a moment that YOU think you’re being hypocritical. What confuses me most of all is that when I hold it up to your eyes in as plain and obvious a fashion as it is possible for me to do so, you still deny that the contradiction exists.

Person July 19, 2006 at 12:55 pm

Curt, I think you’re starting to experience what I feel whenever I try to communicate with Stephan. (Well, or with you, but I want to focus on the positive here.)

Stephan Kinsella July 19, 2006 at 1:03 pm

Person–Howland is not being a gadfly, I don’t think. He just is confused by my distinctions and for some reason not able to or unwilling to look at this coherently.

Howland — look. I have all along, for years, said trademark can be justified as a type of fraud perpetrated on the buyers, by the seller falsely representing his identity. I pointed this out early in this thread and never hid it. I have been very clear all along my basis for this: that it is a type of fraud by the seller on the buyer. But it does not imply a right to reputation, and indeed I have consistently written about this too.

If you want to imagine some “reputation” aspect is involved in a given case of fraud, and then generalize by saying, “well that shows there is a right to reputation,” you are just confused. THis just does not follow. Are you saying this? I have no idea, because I asked you to clarify/elaborate but you failed to do so.

If you can’t understand why saying A can defraud B does not imply a right to a reputation, I can’t help you. If you can’t see this is a pure non sequitur by you, what do you want me to say? You keep meandering around saying I said something earlier to your earlier statemetn contrary to what i’m saying now, but when I ask you to point it out, you don’t, so I don’t know what you mean. I believe I could show you how and why you are reading the wrong things into what I say, and making the wrong implications, if you will carefully and coherently try to re-state your position. If not, not, fine by me, you can stay confused on this topic if you wish.

Curt Howland July 19, 2006 at 1:09 pm

Person, hardly “starting”. My very first discussion with Mr. Kinsella had me frothing at the mouth and screaming at my keyboard. Indeed several discussions between you and I have been vigorous, but the anonymity of your screen name helps greatly. “It’s nothing personal” is a literal fact.

Mr. Kinsella does not have the benefit of my imagination filling in the blanks. His obvious accomplishments mean I cannot dismiss him as a mutant maple tree who’s learned to type only recently. That’s extreme, but I hope you get the idea. :^)

Person July 19, 2006 at 1:13 pm

Stephan_Kinsella: You seem to use the “gadfly” smear as a substitute for thought. You would do well to learn the meaning of the words you use. A “gadfly” is a “persistent or irritating critic; a nuisance”. One way to be persistent or irritating is to constantly point out blatant contraditions in your ideas and your constant pretence of not understanding that, so the fact that someone is a “gadfly” does not suffice as reason to ignore them.

I have said, over, and over, that your use of the argument “IP is invalid because information isn’t scarce” is irrelevant an confused. People don’t fight over information; they fight over its use in physical objects. There is conflict in this dimension, ergo it is the domain of property rights. I have explained this to you multiple times and multiple ways, yet you still appeal to information’s non-scarcity as if it were ironclad proof of the invalidity of IP.

You need to be honest with yourself and for once in your life, admit when you are wrong. I’m sorry that I made it too difficult to dig up personal information on me; you’ll unfortunately have to focus on my ideas instead.

Curt Howland July 19, 2006 at 1:18 pm

Mr. Kinsella, I never said “a right to reputation”. I said fraud. The deliberate use of my name to leverage whatever it is my name means to some hapless buyer, who is thereby harmed.

I believe this to be actionable and you don’t. If you were able to leave it at that, I would be happy to disagree and walk away. But you can’t.

Trademark is nothing else. It is reputation. If there is any basis what so ever for “trademark” at any level, then you are allowing that reputation has meaning.

In fact, what good is it to missrepresent if there is no benefit to be gained? Why say “apples” if what you’re really selling is sludge, unless there is benefit in missrepresenting it, in leveraging the reputation of “apples” as held by the buyer?

Replace “apples” with “MacDonald’s”, it makes no difference. Either there is something there to leverage, some purpose to “trademark”, some benefit for the perpetrator of the fraud, or there is not. You cannot say there is, and at the same time that there is not, which is all I see you doing.

Stephan Kinsella July 19, 2006 at 1:20 pm

Howland: “Person, hardly “starting”. My very first discussion with Mr. Kinsella had me frothing at the mouth and screaming at my keyboard.”

Hey–this is not my wife is it? Cin–is that you?

“Indeed several discussions between you and I have been vigorous, but the anonymity of your screen name helps greatly. “It’s nothing personal” is a literal fact.”

“Mr. Kinsella does not have the benefit of my imagination filling in the blanks. His obvious accomplishments mean I cannot dismiss him as a mutant maple tree who’s learned to type only recently. That’s extreme, but I hope you get the idea. :^)”

Could you repeat the question?

Person: “Stephan_Kinsella: You seem to use the “gadfly” smear as a substitute for thought.”

No; just an explanation for why I sometimes stop taking some people seriously. Not saying you fall in this category all the time; I vaguely recall having formed that impression some times in the past.

“You would do well to learn the meaning of the words you use. A “gadfly” is a “persistent or irritating critic; a nuisance”. One way to be persistent or irritating is to constantly point out blatant contraditions in your ideas and your constant pretence of not understanding that, so the fact that someone is a “gadfly” does not suffice as reason to ignore them.”

Ask serious question or make serious points in serious ways, without sophistry or attitude, and maybe you’ll make some headway.

“I have said, over, and over, that your use of the argument “IP is invalid because information isn’t scarce” is irrelevant an confused.”

I seem to recall this.

“People don’t fight over information; they fight over its use in physical objects.”

Uh, yeah, this is actually my criticism of IP. That it amounts to assigning property rights in pre-owned physical objects to latecomers merely because they thought of a recipe.

“There is conflict in this dimension, ergo it is the domain of property rights.”

Er… right. And I have explained that as a libertarian, I believe such conflict should be solved by assgning property rights in the object in question, to the one with a better claim to it; and that this is the person who, ceteris paribus, possessed it first as between the competing claimants. I.e., the Lockean homesteading approach. And that to grant IP rights would mean an exception to this rule. And I also pointed out that this is really what all crime, socialism, statism, amounts to: deviations from the libertarian propery-assigning rule; so to that extent IP is similar to all these other non-libertarian systems.

“I have explained this to you multiple times and multiple ways, yet you still appeal to information’s non-scarcity as if it were ironclad proof of the invalidity of IP.”

Information’s non-scarcity shows that it is just not the kind of thing we assign property rights in. Quite right. Yet you want to anyway. You do it by taking my rights in my objects and giving part of them to the innovator. I call that theft.

“You need to be honest with yourself and for once in your life, admit when you are wrong.”

I am honestly wrong.

“I’m sorry that I made it too difficult to dig up personal information on me; you’ll unfortunately have to focus on my ideas instead.”

Darn you!

Manuel Lora July 19, 2006 at 1:28 pm

I should be able to use my property in whatever manner I wish. Thus, I can write “Microsoft” and sell some CDs. But this would not be aggression against Microsoft. It would only be fraud against those who buy CDs from me.

Stephan Kinsella July 19, 2006 at 1:33 pm

Howland: “Mr. Kinsella, I never said “a right to reputation”. I said fraud. The deliberate use of my name to leverage whatever it is my name means to some hapless buyer, who is thereby harmed.”

“I believe this to be actionable and you don’t.”

You think if you deliberately use your name this is “actionable” “fraud”? Or are you saying if I use your name to defraud someone, then it is actionable?

I of course think that if I obtain property from someoen by means of a misrepresentation (such as, a misrepresentation as to who I am, if that is material), sure, that can be a case of fraud. Why do you think I ever denied this? Seriously?

“Trademark is nothing else. It is reputation.”

Well, that is imprecise language and use of metaphor that is prone to misunderstanding. A trademark is a mark associated with a given product or service. As i explain in my article on IP, “A trademark is a word, phrase, symbol, or design used to identify the source of goods or services sold, and to distinguish them from the goods or services of others. For example, the Coca-Cola ® mark and the design that appears on their soft drink cans identifies them as products of that company, distinguishing them from competitors such as Pepsi®.”

So it is just not true that “trademark is reputation.” The concepts are related, perhaps, but it’s a false equation.

I have explained that trademark in its current form is not justifiable because it gives a right to the trademark owner, which does imply a right in one’s reputation, in a sense. I stated that a version of trademark could be justified but only if the rihgt to sue is the right of the deceived customer. This analysis does not at all rest on the notion that “trademark is reputation” or that there is a right to reputation.

I honestly am not sure what you think we disagree on. Why don’t you try to clarify?

“If there is any basis what so ever for “trademark” at any level, then you are allowing that reputation has meaning.”

? I never said reputation “has no meaning”. What are you talking about?

“In fact, what good is it to missrepresent if there is no benefit to be gained? Why say “apples” if what you’re really selling is sludge, unless there is benefit in missrepresenting it, in leveraging the reputation of “apples” as held by the buyer?”

Sure, there is a *reason* people commit fraud–to obtain others’ property when they otherwise coudln’t (because they konw they don’t have the real means to pay for it–this is “why” they misrepresent that they do). Sure, they commit fraud to gain a benefit. And your point is—?

“Replace “apples” with “MacDonald’s”, it makes no difference. Either there is something there to leverage, some purpose to “trademark”, some benefit for the perpetrator of the fraud, or there is not.”

Right, a McD’s has an easier time getting customers because of the reputation it’s built up. Sure. So? This is why people do knockoffs. I erect a fake McD’s b/c it would get more customers than if I set up “Curt’s hamburgers”. And the victims are the customers who believe they are buying a genuine McD’s burger. McD is not the victim.

Anyway I gave almost the same hamburger example in my IP article. I have no idea what you are getting frustrated about, other than maybe an inability on your part to coherently and precisely state your views.

“You cannot say there is, and at the same time that there is not, which is all I see you doing.”

What? I have never denied there is such a thing as reputation. What in the world are you jabbering about?

Curt Howland July 19, 2006 at 1:39 pm

Actually, this “July 19, 2006 01:20 PM” brings in how Mr. Kinsella and I both agree and disagree.

I can own a cube, I cannot own “cube” the mathematical construct. It would be like the person who invented the idea of the atom claiming property ownership of all atoms, or a filter company owning all rights to “fresh air”. So while the physical object(s) are scarce and ownable, the ideas around them are not.

Yet also scarce are the bearing oilers made by the McCoy manufacturing company. In order for something to have the words “The Real McCoy” on it, to be represented as a McCoy bearing oiler, it must in fact be a real McCoy. Claiming that one is, when it is not, is fraud. It seems like ownership of an idea, but it’s not.

Just like someone named MacDonald can open a restaurant and call it “MacDonald’s” without there being any fraud involved, someone else can utilize the name “MacDonald’s” to deliberately defraud the buyer by leveraging the meaning of “MacDonald’s” that that buyer attaches to that name.

Killing someone can be a crime, and killing someone can be perfectly legitimate. The difference is motive, reason, purpose. It is reason, motive, purpose that create fraud.

Curt Howland July 19, 2006 at 1:48 pm

Mr. Kinsella, I’m sorry that we’re talking past each other. It’s also clear, since you continue to ask me to clarify, that you haven’t yet realized I’ve been constantly clarifying to no effect.

“I of course think that if I obtain property from someoen by means of a misrepresentation (such as, a misrepresentation as to who I am, if that is material), sure, that can be a case of fraud. Why do you think I ever denied this? Seriously?”

You have repeatedly stated that it is not actionable, that I may not sue someone for deliberately and fraudulently using my name/trademark. You have been very consistant about this, claiming that since I am not the buyer I have not been harmed, and therefore have no standing what so ever.

This is a contradiction with your statement that there is some basis for trademark. Do You Understand?

Stephan Kinsella July 19, 2006 at 1:53 pm

Curt: “I can own a cube, I cannot own “cube” the mathematical construct.”

Well, right, not only that, in sense, there ARE no “cubes”.

“It would be like the person who invented the idea of the atom claiming property ownership of all atoms, or a filter company owning all rights to “fresh air”. So while the physical object(s) are scarce and ownable, the ideas around them are not.”

Yes.

“Yet also scarce are the bearing oilers made by the McCoy manufacturing company. In order for something to have the words “The Real McCoy” on it, to be represented as a McCoy bearing oiler, it must in fact be a real McCoy.”

Sure. Otherwise it coudl be fraud. COULD be, not necessarily is.

Let me give you an example. Suppose I want a Louis Vuitton purse. It costs $1000. Or, I can buy a knockoff for $20. So I buy the knockoff. I *want* it to be falsely labeled. Am I defrauded? No. Who is defrauded? No one. Whose rights are violated? No one’s. Only LV’s–and only if there is a right to reputation, which there is not.

Arguably, people who see me with the purse are deceived into thinking I have an expensive purse. I am in a sense lying to them. But is this fraud? No. Mere lying is not fraud.

NEXT!

“Claiming that one is, when it is not, is fraud.”

Sure. If I sell you el-cheapo screwws w/ McCoy on them to make you think they really come from McCoy, I am defrauding you.

“Just like someone named MacDonald can open a restaurant and call it “MacDonald’s” without there being any fraud involved, someone else can utilize the name “MacDonald’s” to deliberately defraud the buyer by leveraging the meaning of “MacDonald’s” that that buyer attaches to that name.”

Sure. Fine. It’s all context related.

“Killing someone can be a crime, and killing someone can be perfectly legitimate. The difference is motive, reason, purpose.”

And consent. Did you have consent of the killee.

Manuel Lora July 19, 2006 at 1:58 pm

Killing someone can be a crime, and killing someone can be perfectly legitimate. The difference is motive, reason, purpose. It is reason, motive, purpose that create fraud.

I have a problem with that statement. If that were true, then hate crimes, would be somehow worse than crimes commited with other motives or reasons other than racism, etc. A killing is a crime not because of what the killer was thinking or what he wanted to accomplish, but because it was an unconsented-to use of force against a body owner. This is aggression.

It doesn’t matter the motivation (pyschology deals with that). What matters is that there has been a victim.

Stephan Kinsella July 19, 2006 at 1:59 pm

Curt: “Mr. Kinsella, I’m sorry that we’re talking past each other. It’s also clear, since you continue to ask me to clarify, that you haven’t yet realized I’ve been constantly clarifying to no effect.”

Right. Look. I often insist on precision at an early state, even if it takes time and sidetracks,because in my experience failure to do so can allow imprecision to sneak in and be used at a later stage to arrive at incorrect conclusions. So I’ve been trying to force you to speak precisely, to ask the question properly, or coherently, etc, to avoid any ambiguity.

“I of course think that if I obtain property from someoen by means of a misrepresentation (such as, a misrepresentation as to who I am, if that is material), sure, that can be a case of fraud. Why do you think I ever denied this? Seriously?”

“You have repeatedly stated that it is not actionable, that I may not sue someone for deliberately and fraudulently using my name/trademark.”

Um. You seem smart. Why can you not understand what I have said dozens of times now. A misreprenstation used to get property from A gives A the right to sue me for fraud. If the misrepresentation *concerns a third party C* (e.g., if the misrepresentation is that I am selling you products-of-C when I am not), then C does not get a right to sue me. It is still A.

That is why YOU may not sue someone for using your name. They are not defrauding YOU they are defruading the poeple they are dealing with. I do not insist you agree with me on this, but surely you can see THAT THIS IS WHAT I am claiming. Can you not even see this?

“You have been very consistant about this, claiming that since I am not the buyer I have not been harmed, and therefore have no standing what so ever.

“This is a contradiction with your statement that there is some basis for trademark. Do You Understand?”

No. I have said that the only way to justify trademark is to say that defrauded CUSTOMERS have the right to sue, NOT THE TRADEMARK OWNER. I stated this extremely explicitly in the trademark discussion in my long Against IP article.

Manuel Lora July 19, 2006 at 2:10 pm

This thing has turned into a meta-discussion now, about what people mean by their statements and not about the statements themselves.

Nothing to see here…move along…

Stephan Kinsella July 19, 2006 at 2:16 pm

Manuel:
“‘Killing someone can be a crime, and killing someone can be perfectly legitimate. The difference is motive, reason, purpose. It is reason, motive, purpose that create fraud.’

“I have a problem with that statement. If that were true, then hate crimes, would be somehow worse than crimes commited with other motives or reasons other than racism, etc. A killing is a crime not because of what the killer was thinking or what he wanted to accomplish, but because it was an unconsented-to use of force against a body owner. This is aggression.

“It doesn’t matter the motivation (pyschology deals with that). What matters is that there has been a victim.”

this may be a slight overstatement; see my post
Hate Crime–Intentional Action and Motivations.

scott t June 28, 2009 at 12:10 am

i am unclear about the aggression aspect of what is being called fraud.

if i claim to offer insurance and someone sends me premiums but all the while i never intend to ‘insure’ anything but just spend the cash…that would seem to me to be fraud. title transfer of cash for a (unknown to the insurance purchaser) non-existent insurance service.

but if i put a label on a piece of apparel to trick the buyer into believing that the apparel is a specific brand…that is not fraud but dishonesty because anyone can brand a piece of apparel any way they wish ’cause noone owns letters, colors and shapes.

i dont see aggression anywhere…forcibly taking money for insurance wold seem to be mobbish aggression.

am i misunderstanding something?

Michael November 18, 2011 at 11:54 am

I agree with your article in principle Stephan, except for one thing-I know of no aggression definition that does not involve coercion. It is defined as unprovoked attack. We agree that fraud is wrong, but it does not fit into the definition of aggression if there is no physical force involved. http://dictionary.reference.com/browse/aggression

Stephan Kinsella November 18, 2011 at 1:00 pm

Libertarians oppose aggression, sometimes referred to in shorthand as the initiation of force. That means they are not against force or violence per se–only if it’s initiated, or not consented to.
Likewise, coercion is not always wrong–it can be aggressive, or defensive. https://www.stephankinsella.com/2009/08/the-problem-with-coercion/

If you insist that aggression only means physical attack, then trespass on others’ property (say, breaking into their house when they are not home) is not aggression. In that case we have to classify it as trespass–using someone’s owned resources without their permission. Most people think ti’s conceptually cleaner to treat trespass as a type of aggression–they are both uses of others’ resources without their permission–wehther the body (which would be a type of attack) or owned resources (trespass). in any case, whether you consider property trespass as aggression or not, it is unlibertarian, and fraud is also for the same reason: fraud means you use deception to acquire access to someoen’s property, without their genuine or informed consent. So it’s just a type of trespass. Fraud is just a way of committing trespass, a means of doing it. That’s why I say the best way to think of it is theft (or trespass) by trick. So whatever type of crime trespass or theft is, fraud is just a species of that.

 

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