Just over two weeks ago, Mises U attendees were offered an excellent lecture from Dr. Robert P. Murphy which was a primer on the current (and longstanding) debate between Rothbardians, who oppose fractional reserve banking (FRB) per se and Free Bankers, who consider FRB to be legally legitimate and economically sound. The lecture mainly outlines the economic debate of whether or not the issuance of fiduciary media leads to the Austrian business cycle. Murphy does, however, quickly go over one of the legal talking points about FRB, which I would like to comment on here.

Murphy introduces one of the biggest points of contention within the legal debate by saying; “[With FRB] there’s a sense in which it’s multiple people with claims on the same piece of property”. That is to say, that it appears to both depositor and borrower, that they have title to one piece of property. If someone makes a deposit of $1000 and then $900 of that deposit is loaned out, it appears to both the depositor and the borrower have title to the same $900.

This is the crux of the problem. Under the Austro-libertarian conception of property, no two people can ever have the same (unrestricted) title to the same physical property. Both George Selgin and Lawrence White, prominent free bankers that Murphy discusses in his lecture, accept this theory of property and contract as they profess in their 1996 article, “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!”. The free bankers, however, have a simple rebuttal to this supposed problem of double-title to a single piece of property: The title to the money deposited does transfer from the depositor to the bank. You can see White in a 2011 FEE lecture in which he confronts this problem face on:

How can two people have title to the same coin? And the answer is two people do not have title to the same coin. When you put your money in the bank with the understanding that they’re going to give you an account balance that doesn’t charge a storage fee and pays you interest you’re giving up ownership of the coin.

Later in the lecture Murphy briefly mentions this point only to note that historically legal rulings have gone this way without proposing a Rothbardian response, only mentioning that these legal theorists have argued that “it shouldn’t have gone that way and that that is nonsensical”.

Murphy offers up a free banking “rebuttal” to this problem. Murphy describes the free banking position as follows:

This was a voluntary choice. Everybody has known for a long time that the bank doesn’t have your money in a little drawer with your name on it. Everybody knows fractional reserve banking happens. Otherwise, how could they pay you interest on checking accounts? So it’s voluntary. The market has ruled and in history we don’t see a lot of hundred percent reserve banks do we? And so it shows that it doesn’t pass the market test.

Murphy notes that legal theorists like Hans-Hermann Hoppe and Walter Block have equated the FRB contract to a voluntary contract which stipulates that I will sell you a squared circle. Since it is impossible to give two people title to the same piece of property, it would be equally absurd.

The problem with this attack is that the supposed rebuttal that Murphy offers is not a rebuttal to the question of double-title to property. This rebuttal is one that attacks the empirical proposition that people are unaware of the practice of fractional reserve banking. As Hoppe puts it in his 1994 article, “How is Fiat Money Possible? -or, The Devolution off Money and Credit”, “Even if the bank were to pay interest on deposit accounts, and hence it should have been clear that the bank must loan out deposits, this does not imply that any of the depositors actually understand this fact. Indeed, it is safe to say that few if any do, even among those who are not economic illiterates.” The above arguments of the free bankers are to show that people are aware of FRB practices, not to show that the legal absurdity of double-title is legitimate.

The free bankers do not believe that two people can have title to the same piece of property and have, for about a quarter century now, offered the same response: Depositors give up title to the money they deposit.

If Rothbardians are going to be successful in their legal attacks on FRB, they must show that it is impossible for a depositor to transfer title to their money to the bank while still holding a right to have title revert to them at a chosen point in the future. While Murphy certainly recognizes this as important, he attributes the incorrect free banker argument to the problem, creating confusion in his lecture about the positions of both schools; Rothbardians and Free Bankers. But there need be no question about the position of the free bankers: Depositors give up title to the money they deposit.