Home » Fractional reserve banking » Reddit to the Rescue of Phony Checks.

Reddit to the Rescue of Phony Checks.

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Over at reddit a person called nickik has come to the defense of Horwitz, or more accurately, of so called “free banking”, meaning of allowing banks to write checks for money they do not have. [My article against it is here]. The ideas he presents deserve a response. I’m not sure why, but he spells things rather oddly sometimes, for example, writing “then bugs” for “ten bucks”. To put the best face on his argument, I am going to correct those mistakes on my own when quoting him. I also insert a word or two in brackets sometimes. [All the bracketed stuff is from me]. Finally I will replace some words with more refined synonyms, in keeping with this blog’s high standards. You can always consult the original by going to the link provided above.

As always, quote from others get italics, I get the standard font.

Nickik’s first line of defense is that since everything is voluntary every step of the way, there’s nothing wrong with it:

So if I promise you to give you $10 when you hand me a slip of paper that says “I give you ten bucks when you give me this paper” and other people VOLUNTARILY use that as a medium of exchange because they accept it as money because they believe that I will actually do that, it’s absurd [to condemn such a practice]. It’s all voluntary interaction; nobody was forced or in any way cheated.

Everything he says is right except for the very last word, cheated. True, nobody was forced. But plenty of people were cheated.

The thing is, just because someone voluntarily agrees to something doesn’t mean he wasn’t swindled. In fact the best swindles and frauds use no coercion whatsoever. If A sells B a pill that relieves headaches in the short run, but causes a gruesome painful death 24 hours later, I think we can agree that A is defrauding B if he sells him that pill as a headache reliever [making no mention of its awful side effects], even if the sale was voluntary.

In my humble article I proved logically, step by step, that when a bank writes checks for money that doesn’t exist, that it causes inflation and hyperinflation. Neither nickick nor anyone else has refuted this. [Although George Selgin once defended it by saying the inflation and hyperinflation caused by “free banking” only happens once per check written. My response is that the pickpocket, too, only picks your pocket once]. The fact that most people do not understand they are being robbed of their purchasing power by this practice does not make it OK.

To better see what’s going on, let’s apply nickik’s reasoning to the Wiemar Republic. The govt of Gemany between the world wars printed oodles and oodles of money, spent it on things it wanted, and thus directly caused hyperinflation which ruined the lives of millions. [Many claim that the poverty and hunger they caused was directly responsible for the rise of Adolf Hitler, and thus the deaths of tens of millions of people world over, but we can put that aside for now. Impoverishing a whole country is bad enough]. Nickick would argue that’s it’s all honkey dorey. People voluntarily accepted the newly printed money. Nobody was cheated, he thinks. The inflation and hyperinflation caused by that money printing is perfectly all right.

The govt printing money and banks writing checks which are accepted as money by everyone are basically the same thing. In both cases, someone increases the money supply. The banks increase it tenfold in the United States. In other words, nockik is providing a defense of knowingly causing hyperinflation, because nobody is smart enough to protest, and that makes it OK.

Nickik continues his defense of inflating the money supply:

I’ll give you a quick example. If I want something from you and I don’t have money, I might offer to give you a McDonald’s coupon. You accept that coupon because you are reasonably sure that in a couple of days McDonald’s will still exist, but you know that there is a small chance that McDonald’s defaults before you get to use the coupon.

Now why should it be illegal to voluntarily trade such coupons?

What should be illegal is not trading in the coupons, but printing them in the first place, if by so doing it will create inflation and hyperinflation, as fractional reserve banking inevitably does. The reason we see nothing wrong with the McDonald’s coupons is because, relative to the economy as a whole, they are a drop in the ocean. Also, almost nobody will actually accept those coupons as money. I’ve had those things many times and allowed them to expire for lack of interest, or given them away to total strangers who asked me politely for them.

Nickik continues:

I give you another one, if McDonalds can provide 1 Million burgers per day and the give out 2 Million coupons for burgers, should it be illegal for them to do so because right at that moment they could not handle it if all people wanted burgers at the same time?

Maybe, maybe not. I have an open mind about it. But the point is, those coupons do not increase the money supply, and thus do not cause inflation and hyperinflation.

I’ll just summarize the rest of his post in my own words. He says that farmers in the old days sometimes needed to borrow money, and it was the banks that came through, printing up checks for nonexistent money, that saved the farmers.

What can I say? Farmers have been around way before banks gave out phony checks, and somehow always found a way to borrow money.


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