The purpose of this article is to show that fractional free banking creating so-called fiduciary media is not a fraudulent system and does not cause a systemic boom-bust cycle, but on the contrary, it is an evolutionary improvement of monetary societal relationships. The article opposes a subset of authors of the Austrian School of Economics who argue for 100 percent reserves in a banking system. It builds upon the presented ‘Theory of the Interest Rate’ and ‘Critique of the Regression Theorem’.
Among so-called reservists, I will count the proponents of a 100% backing of currency by precious metals – or more accurately, a hundred percent holding of reserves of precious metals by banks. Among the contemporary members of this branch are (alphabetically): Walter Block, Peter Boetke, Hans Herman Hoppe, Jorg Hülsmann, Joseph T. Salerno, Jesus Huerta de Soto, and Mark Thornton. Among so-called fractionalists, I will count the proponents of ‘backing a currency’ with precious metals, while this backing is only partial, i.e. anything less than 100% and more than 0% (fiduciary media system). The contemporaries of this branch include (alphabetically): Steve Horwitz, Pascal Salin, George Selgin, and Lawrence White.
An extensive discussion between fractionalists and reservists within the Austrian School occurred between 1994 up until years 2004-2005. In principle, the debate defines two key principles which are at the root of the disagreement. The first is the disagreement about whether or not the fractional system is fraudulent, i.e. whether fractional banks infringe on individual’s property rights. The second problem has an economic character and is related to whether the fractional system creates a systemic boom-bust cycle (any economic activity, of course, can cause a boom-bust cycle because people make mistakes; the question however is whether a fractional system leads to systemic economic errors).
The goal of this article is to defend the fractionalists and the fractional banking system. The result of this article should also include an answer to a question asked by Hülsmann: “why a hundred percent system should be an inferior system”. I will base this on the works of the reservist, to which it will be necessary to react, while I will also, when needed, point out the mistakes, or needs for correction, in the works of the fractionalists.
Part I: The problem of fraud. Is a fractional system of banking a fraudulent activity?
One of the biggest problems of any discussion is a proper definition of terms. In our case, the question is: how to define money? If the discussion between reservists and fractionalists pointed out anything concrete, it was a confusion in definitions. And it can be seen in both camps. Hoppe, for example, does not hesitate to throw fiat money to the same basket as fiduciary media. As Selgin, White (S./W.) (1996) point out:
(1) „Hoppe tacitly redefines the category of fiat money to include banknotes and deposits that are redeemable-on-demand claims to commodity money so long as they are not backed 100 percent by reserves of commodity money … According to Misesian terminology, then, a fractionally-backed banknote that is de facto redeemable, and is recognized by the public to be redeemable, is not example of fiat money. Contrary to Hoppe´s innovative phraseology, it is neither a „fractional” fiat money nor a „partial” fiat money. It is instead a fractionally or partially fiduciary medium.“
Discrepancies in definitions are next pointed out by Hoppe with Hülsmann and Block (H./H./B.) (1998):
(2) „As Hoppe formulated it, “two individuals cannot be the exclusive owner of one and the same thing at the same time.“ … In issuing and accepting a fiduciary note (at a necessarily discounted price), both bank and customer have in fact, regardless of whatever they may believe or think about the transaction, agreed to represent themselves — fraudulently — as the owner of one and the same object at the same time. … Selgin and White do not recognize the fundamental praxeological difference between property and property titles. Rather, in subsuming money (gold) and money substitutes (banknotes) under the same heading of “money,” they continually obfuscate this very distinction. For if money (gold) and titles to money (banknotes) are both defined as “money,” then it indeed seems to follow that it does not make any difference whether the supply of money or that of banknotes increases. Both are “money” and hence, by definition, in both cases the same event — an increase in the supply of money — has taken place. “
Selgin (2000), therefore later explained:
(3) „ … this novel fraud argument is based on a simple failure to recognize that redeemable banknotes and deposit credits are not “titles,” as Hoppe and his co-authors claim. They are instead IOUs, so there is nothing inherently fraudulent about there being more of them in existence at any moment than the total stock of what they promise to deliver. “
These quotations are only a small example of the confusion that we can ‘clean up’ using and ontological approach. Ontology creates “a set of concepts and categories in a subject area or domain that shows their properties and the relations between them”. An ontological approach allows for differentiating between different objects of reality on the basis of an insight of their characteristics and the relationships between them. Ontology of money is therefore on of the potential routes for bringing a certain degree of ‘definitional order’ into the discussion.
Both reservists and fractionalists consider money to be gold (every time we talk about gold, we can also be talking about its twin – silver) – in this respect, there is no disagreement between them. By using the term basic money, however, they imply that there exists a broader version of money. We can use reservist quotes that correctly point out what we also want to point out. H./H./B. wrote the following about defining money:
(4) „Money cannot but originate as a commodity, such as gold. Gold, then, as money, is defined as “the generally acceptable medium of exchange,” … Money substitutes, in turn, are defined as claims or titles to specified amounts of money (gold). If money substitutes (paper notes) are fully covered by reserves of money (gold), Mises denotes them “money certificates,” and we will refer to them here simply as money substitutes. If money substitutes (paper notes) are uncovered by money (gold), they will be referred to as fiduciary media instead …
… to refer to both money and money substitutes indiscriminately as money is to obscure the difference between two categorically — praxeologically — distinct phenomena and states of affairs. …
… Titles to money are — and should be — backed by money in the same way and for the same reason as titles to cars are and should be backed by cars. This is what defines them as property titles …“
The above quote, however, implies that either ‘property titles’ or ‘money substitutes’ are not money per se. They are different objects of reality, i.e. as property titles to cars and real estate (example used by H./H./B.) are not themselves cars and real estate, property titles to money are not themselves money. From an ontological point of view, only one thing can be money. All other tools that we use in the monetary world (money substitutes, fiduciary media, fiat money, money derivatives) must, by definition, be something else. It is as logical as when we do not classify airplanes or hang-gliders as birds, even though all three objects of reality are able to fly under certain circumstances. It is interesting that reservists notice the difference between these ontologically different objects of reality and point it out, which is apparent from the following quotations:
(5) There are money (gold) and money substitutes (titles to money) in existence, and there are titles to non-money goods (equity titles) and titles to non-yet-existing future goods (debt claims).
(6) It is different with money substitutes. They can only come into being as a claim, a part of a contract that fixes their exchange rate to money. They are signs, expressions for the disposition of certain quantity of money. When they are exchanged against money they are redeemed. Redeemability is the original meaning of the term convertibility. A document that is convertible in this sense can never have a value different from the object that it gives a claim to. A convertible currency – money substitutes in the form of bank notes – can neither be a money nor a standard. Only irredeemable notes are money – that is, fiat money. They are valued separately because they can be used independently from other goods. … In a system of free banking – whether on a fractional or 100-percent-reserves basis – the demand deposits and banknotes of the competing banks are substitutes. They represent a convenient means of documenting claims on money.
(7) This is show intrinsically worthless pieces of paper can acquire purchasing power. If and insofar as they represent an unconditional claim to money and if and insofar as no doubt exist that they are valid and may indeed be redeemed at any time, paper tickets are bought and sold as if they were genuine money – they are traded against money at par. Once they (money substitutes) have thus acquired purchasing power and are then deprived of their character as claims to money (by somehow suspending redeemability), they may continue functioning as money.
If we consider money to be gold and the banking system does not produce gold, a question arises: “What does a 100% reserves banking system or a fractional banking system create?” This question is key within the discussion of reservists and fractionalists. It, of course, requires an ontological answer. It is interesting that both camps answer this question correctly in principle, but inaccurately. And it is exactly this inaccuracy which creates the definitional confusion in both camps. They claim that the system they prefer does not create money per se, but it creates money substitutes (see above quotations 6, 7, and 8), or fiduciary media. From the quotes and articles, we can see that both camps talk about different objects of reality, but they do not approach them precisely enough in the context of them being different objects of reality. If they are different objects of reality, we must be dealing not with a substitution of money, but rather with a substitution of characteristics we attribute to money. It is then not possible to claim about these objects of reality created in the banking system that they have completely identical characteristics to money – if they did, they would be money directly. The difference does not stem only from defining their different appearance, creation, or physical nature, but also from the way how they gain their valuation. What we can claim about these different objects of reality, therefore, is that they react similarly to the economic problem that money solves (later we will show how and why). It is similar to the example of the bird, plane, and hang glider – these objects fly under certain circumstances, but each of them has different characteristic attributes, i.e. each can fly under different circumstances. It is important to realize that this is not a trivial detail. Quite the opposite.
We can show the reservists’ inconsistency on two of the above quotations: Hoppe’s (quotation 8) and Hülsmann’s (quotation 7). It is necessary to consider Hoppe’s claim to be correct, and Hülsmann’s to be incorrect. For Hoppe’s claim to be correct, he has to necessarily use conditions in his description (if and insofar no doubts exist), while if Hülsmann does not use the condition of feasibility, his claim is not valid; although he does explicitly realize that the creation of new objects of reality comes into being as an obligation. His claim would, same as Hoppe’s, be valid only if no doubt exists about the quality of the emitted substitute (claims) for money by a third party. This is because the valuation of these objects of reality is not dependent only on the underlying asset (money per se; which follows from Hülsmann’s quotation), but is also dependent on the trustworthiness of the third party and the related belief that it will fulfil its obligation; i.e. if and while there is no doubt about the given 100-percent-reserves bank behaving in the same way as it declares it does. ‘If and while’ also indicates that a valuation of an object of reality that is created by the banking system (in the reservists’ case by a bank with 100 percent reserves), i.e. money substitute, depends on different socio-economic relationships than what the valuation of money itself depends on. In the case of a third party it is, for example, the trust that the bank will fulfil its obligation, but also its business plan, i.e. successfulness of crediting, value stability of its portfolio, reputation, history, etc.
Fractionalists, however, are also not completely consistent. Selgin and White do point out the necessity of trustworthiness of a third party. This is apparent from them bringing attention to the fact that fractional banks are not trying to hide their lower reserves, or that declaring higher reserves than the bank really has is to them a form of fraud. Although, since they do not unambiguously approach fiduciary media as different objects of reality to money, they bring confusion to the argumentation. Let us see – they write in the footnote of their work:
(8) The demandability of a particular claim issued by a bank, i.e., the holder’s contractual option to redeem it at any time, is not per se a representation that the bank is holding 100 percent reserves against the total of its demandable claims. Rothbard (1990, pp. 49-50) argues otherwise, based on the view that a bank’s demand deposits and notes are necessarily ‘warehouse receipt“ and not debts. We do not see why bank and customer cannot contractually agree to make them debts and not warehouse receipts, and we believe that historically they have so agreed.
With the last sentence, they imply that they consider the object of reality ‘warehouse receipt’ for a substituteof money, while they say that the bank and client can voluntarily change this money substitute into debt (obligation – ergo a different phenomenon of reality). The criticism raised by H./H./B. is therefore legitimate in this context, but, as ontology of money shows us, irrelevant. This is because it is obvious that S./W. make a mistake in not explicitly recognizing that they are dealing with different objects of reality, i.e. obligations, and they still claim that it is a money substitute in the meaning that it is the same object of reality as money.
S./W.’s argumentation is correct in the context of consequences, though. I.e. as we have shown earlier, a ‘warehouse receipt’ has the same character as debt, which is a form of obligation. A receipt (claim) and a currency (fiduciary media) are therefore objects of reality whose characteristics are identical to the characteristics of an obligation. That is why clients can consider it an obligation (debt) and a bank approaches it in the same way. If they explicitly recognized these differences, their argumentation would be consistent, i.e. it is true that both the bank and the client voluntarily perceive the given object of reality as an obligation of the bank to the client, at that is exactly what was happening historically.
And as we can see from how the discussion between fractionalists and reservists evolved, later Selgin (2000) realized that the banking system creates IOUs – see quotation 4, and the same was realized by later Hülsmann (2000), who writes in the context of his requirements for what he calls ‘honest fractional banking’:
(9) „Fractional reserve banks would have to use a different language than they commonly use, because words such as “deposit” are deceptive. They would have to make it clear that money “deposited” with them is in fact a credit of unspecified duration. And the “bank notes” they issue would have to be presented not as money titles but as some sort of very liquid IOUs. “
It appears, that an ontologically consistent answer to the question of what the banking system creates is that it creates IOUs (I Owe You) – obligations. That stems from the fact that a third party – the banking system – enters into the relationships. The obligations of the system themselves can then vary, and their legal and financial characteristics can also vary and expressed as e.g. titles to money, equity titles, debt, etc. (see quotation 6 and take the variety of today’s financial derivatives as an example). Even with a reservist understanding of the banking system, the banks create IOUs. A receipt for deposited gold is not the same as money itself. Banks create a (billable or clearable and tradeable) obligation against an underlying asset that has an exclusive form of gold and a bank holds a 100% reserve of the underlying asset. At the same time, it only lends that money (deposits) for which it has gained an agreement from the client (from an ontological point of view we then have to differentiate for example between a bank and a custodian bank). Even in a fractional system, banks do not create money. They create what we call ‘currency’, which is also a type of obligation for a certain receivable. With ‘fiduciary media’, we are dealing with a currency – a tradable obligation whose value is derived from an underlying receivable (tradable type of asset), while the bank’s obligations are (generally and not specifically) backed by some reserve in the form of a precious metal, which the issuer holds at a rate of 99.xy% to 0.xy%. Money (gold) is then used for a final elimination of the banks obligations in case the client refuses to continue to use the issuer’s currency or a currency of a different issuer in the banking system. Both a 100-percent and a fractional system are from an ontological point of view identical as far as creating IOUs goes. The difference is in what is and what is not an underlying asset, or a part of the underlying asset. It is worth pondering whether or not to use the term property clearing title/clearing claim for both systems, since that term defines the character of the obligation in question.
In the question of fraud, the conclusions of the ontological approach definitely favor the fractionalists. The argument of fraud, where the reservists claim that an act of lowering the level of reserves held by a bank in the form of money (gold) is a fraudulent act has to necessarily fall short. The reservists H./H./B. (1998) claim:
(10) „In issuing and accepting a fiduciary note (at a necessarily discounted price), both bank and customer have in fact, regardless of whatever they may believe or think about the transaction, agreed to represent themselves — fraudulently — as the owner of one and the same object at the same time. “
Considering that, both in the reservist and the fractionalist systems, we are explicitly dealing with an object of reality in the form of an obligation, the argument of fraud cannot be valid as long as the bank correctly and without fraudulent intent declares the level of its reserves that it really holds. The reason for this option is exactly this form of an obligation of this object of reality. What also fails is the argument of H./H./B. about how S./W. incorrectly use the Rothbardian theory of contractual relationships. A criticism focused on the fact that a voluntary contract must be preceded by an existence of an ownership claim to the exchanged good is of course valid. Although, it is also fully applicable to the banking system, since the system generates tradable obligations against tradable assets – it does not generate a substitution for money as an object and an economic phenomenon per se. There is no logical, economic, or legal necessity that says that a debtor cannot offer to eliminate his obligation to the creditor through something other than money (gold) itself. And there is also no necessity that says that a creditor cannot accept this offer of elimination of an obligation. The fact that clients of a bank voluntarily accept lowering of the bank’s reserves in the form of precious metals does not mean anything else than that they voluntarily engage in a model of potential elimination of the bank’s obligations in a form different than money; i.e. in the form of the issuer’s currency or the currency of other issuers, i.e. clearing title/s that the fractional bank/banking system generates against various tradable assets in actual time and wider time continuum (we will describe the economic side of the problem in time later).
In a fractional system, money (gold) only serves for final elimination of debt, which means leaving the banking sector; by withdrawing gold, the client declares indifference to the system and he does so with all the consequences that stem from that (zero interest, problem of storing money – gold, etc.). This is, at the same time, a very crucial economic phenomenon of any free banking system considering the positive attributes of indifference of the object of reality called ‘money’ (gold) to the financial system itself; the indifference is caused by the fact that the object of reality is created differently, has differently defined conditions for market entry and gains its value differently to the object reality in the form of IOUs of the banking system per se.
Superfluous counter-arguments: Double ownership and creation of a new money supply ex nihilo
The reservists also use two more types of superfluous and interconnected arguments (I consider these to be superfluous because they can be disproven using arguments that have already been stated above). The first one is that a currency that represents a certain amount of gold creates an ownership claim of two clients to the same money (gold). The second relates to creating money ex nihilo.
The problem of double ownership of money can also be connected to de Soto’s claim that any fractional system must necessarily go bankrupt because of the inability to insure against the risk of gold withdrawal (of fractional reserves). According to de Soto, fractional banks would spend a portion of their time doing business on monitoring the probability of gold being withdrawn from the bank and based on that, estimate the level of reserves they must hold. To the reservists, this means that banks are not able to fulfil their obligation in the case of every client requesting to withdraw gold. The reservists also claim that because fractional banks used a so-called option clause (an option to delay requested withdrawal of gold) in the past, they explicitly declare that banks are committing fraud. De Soto writes the following about the inability to apply insurance mathematics:
(11) „… all insurance theorists know, the consequences of an event (untypical withdrawal of deposits) which is not totally independent of the “insurance itself (fractional reserve) are not technically insurable, for reasons of moral hazard.“
For the argument to apply, however, the reservists must set a condition in the form of an en masse event. De Soto claims that it is the inability to insure against this event that will create a mass possibility of a general crisis of trust that will not affect only fractional banks whose trustworthiness is negatively impacted, but also every other fractional bank, i.e. the whole banking system. And this will happen in case every client will together and at the same time demand gold. Logically, some will not receive the gold. S./W. in their defense of the fractional system in this sense use empirical arguments about how the banks functioned like this in the past and that they survived even with fractional reserves, while they used the option clause system as a protection against such events.
De Soto’s presumption about a free fractional baking system is unrealistic because of the fact that the banking system does not generate a money substitute – in the meaning the same thing as money, but rather an IOU that the clients voluntarily accept. Since it is an IOU, the bank and the banking system do not face the risk of withdrawal of gold from the system. It does, however, face a (systemic) risk that the client will not be willing to accept fiduciary media of his issuer bank for fiduciary media of a different issuer bank. That means that it faces a risk that the clients will stop believing in the clearing system and clearing titles as such. This changes the optics of the argumentation. Clients, other than withdrawing money (gold), also have the option to apply a value discount on the currency of issuer 1, and in case of bankruptcy of issuer 1, be repaid by selling assets of issuer 1 for a currency of issuer 2 (while applying the value discount on issuer 1’s currency), whose currency is trustworthy and that trustworthiness is based on the bank’s sound business plan. The option of client must necessarily disrupt de Soto’s argument. This is because it is not about utilizing insurance mathematics to determine the probability of gold withdrawal from a particular bank, which the fractional bank would take into consideration anyway. It is about composing financial mathematics related to judging the economic success of a banking portfolio of a bank or banks of the whole system, i.e. trustworthiness of a currency (product of a bank), or currencies (products of the banking sector), which insurance mathematics can be used for. There is then no logical reason for a bankruptcy of a single bank to cause an inevitable bankruptcy of other fractional banks (systemic bankruptcy of the banking system). And the problem described by the reservists is a systemic bankruptcy. Sometimes, the idea of a systemic (en masse) bankruptcy is also based on an incorrect assumption that (all) banks act always and under any circumstances as a fraudulent cartel, or to the detriment of their clients. This is an empirical assumption and not a logical argument. The related historical experience of banks acting more to the benefit of political power, or that they demand privileges if they get into trouble is not a unique behavior connected only with this particular economic sector of the society, and at the same time is not a logical proof of the impossibility of a functional fractional system, because we can apply the same argument in an identical way to the 100-percent banking system as well.
A second superfluous counter-argument is the problem of creating a supply of money ex nihilo. This is a superfluous problem that is related to a failure to ontologically differentiate between money (gold) and IOUs. The growth and decrease of what we (from an ontological point of view incorrectly) call the money supply today, is IOUs of the banking system increasing or decreasing. The bank really odes realize the creation of an obligation ex nihilo, but an obligation is, by its nature, always crated ex nihilo. If John takes his hoe, and helps Ed till the soil in the spring, while Ed, in exchange for his service, offers him a kilo of apples that will grow in the autumn, an obligation is created ex nihilo, but it is created in the context of Ed’s promise to supply the apples. In case it is recorded in some distributable form (e.g. on paper), it is possible to use it, for example within a community, for mutual recognition of debts in other related and unrelated exchanges that occur in the community (what we call fiat money has been created).
What is often missed in the description of the problem of creating money supply ex nihilois that we are dealing with an obligation that is created against a receivable. By definition, there is no multiplication of deposits or creating new money (gold) occurring. The currencies of a fractional banking system are created through the decreasing of reserves. That means that the fractional bank gradually lowers a 100% rate of reserves of money (gold) deposits, against the issued currency. The currency is used to finance economic activity Y through it being possible to use it to obtain capital goods X, or consumer goods Z, which are necessary for economic activity Y. In this way, currencies (obligations) issued in the past to facilitate the creation of X and Z cease to exist. Economic activity Y, through its creation, also enters a never-ending economic process, while the currency (obligation) that enabled its creation will be eliminated in the future in an identical way. The ex nihilo problem does not exist even in the fiat system of banking, where the same thing happens in principle (an obligation is created against a receivable), but without the existence of reserves in the form of money (gold). We can consider only some activities of central banks related to socialization of past debts created against an economic activity that has lost its economic validity to be examples of actual ex nihilo creation of IOUs (so called counterfeit credit).
Part II: The problem of the economic cycle. Does a free fractional banking system cause a systemic boom-bust cycle?
As we pointed out in the beginning of this article, the reservists themselves relatively move away from arguing for whether or not the fractional system is fraudulent. What remains is an important argument used to defend the 100-percent banking system – that any kind of increase of fiduciary media causes economic distortions in the form of a boom-bust cycle and an unnatural redistribution of economic resources. This phenomenon is described by the Austrian Business Cycle Theory (ABCT). The reservist branch’s interpretation of the ABCT is based on the claim that a systemic boom-bust cycle is a result of the following two combinations:
- A. a societally anticipated increase of the money supply (the argument applies to both gold and currency) and creation of new money by fractional banks against reserves lower than 100 percent creates economically ineffective redistribution of wealth. With an addition of a marginal monetary unit, entrepreneurs incorporate the planned increase of the money supply into their plans and the market interest rate is increased in the context of anticipating higher prices. The efficiency of the market mechanism is, however, disturbed because some members of the community (the ones that gain access to the new money earlier) are gaining at the expense of those who gain money only after them.
- B. a socially unanticipated increase of the money supply, i.e. more new money whose creation we did not anticipate will cause an artificial lowering of the interest rate, i.e. a change in the societal rate of time preference. This has an influence on existing savings and consumption – economic subjects change their preferences for current and future consumption. An artificially lowered interest rate causes entrepreneurs to artificially prolong the production structure and therefore increase the consumption of resources. A boom occurs. Since the production structure does not correspond to the societal rate of time preference and a higher rate of investment did not correspond with a higher rate of societal savings, resources were misallocated, which will manifest itself in systemic inefficiency of the new business projects and subsequently their bankruptcy. An economic boom must therefore be necessarily followed by an economic bust.
The above interpretation of the ABCT is possible on the basis of the fact that the argumentation uses a presupposition of objectivization of the objective exchange value of money and also an incorrect approach to the issue of the interest rate. Mises writes that money has “certain objective exchange value”. The same is claimed by Rothbard and implied by other authors (not only within the reservist branch) of the Austrian School. This certain objective status of objective exchange value of money is supposed to stem from the fact that money is a good that enters into every indirect exchange – or in other words, every indirect exchange is realized using it. Austrian authors talk about a ‘certain’ objective exchange value; not an absolute one. This is supposed to stem from the fact that valuation of money and subjects’ anticipation of its purchasing power only depends on the amount of money, i.e. for example the amount of gold, money substitutes or fiduciary media, which we will further refer to as M. M’s price (purchasing power) is therefore objectivized over time, or in other words, we can say that money is value-invariant in time and the purchasing power is changed based on the number of units. Value-invariancy and purchasing power invariancy means that as long as amount of money is unchanged, its valuation does not change over time and purchasing power does the same. Every other good is valued based on subjective valuation principle, which than influence supply and demand for the good and finally the price. The reservists’ explanation, however, implies the opposite for money. Money has purchasing power (price) and therefore there is a demand for money and its consequent supply and to argue this way is possible because money have ‘certain’ objective exchange value. Only new supply of a unit of money causes therefore distortion. If the reader perceives this explanation as elusive, they are on the right track.
This means that, in principle, the Austrian authors claim that money is the only good whose valuation is not influenced by the law of decreasing marginal utility, or that in case of money, it only applies to the number of units of M. M therefore has its value per se, its value is derived from agents’ valuation only on the basis of the number of units of M. That also stems from the description of how M gains its value – through its anticipation into the future based on past price/purchasing power, that changes in case of a change in the number of units of M in circulation.
In the context of the reservist interpretation of ABCT, it must then follow that any increase to the amount of exchange medium M has to, by definition, either dilute the purchasing power of M (anticipated increase) or artificially lower the interest rate (non-anticipated increase). That is because by adding a new unit of money (with an objectivized valuation) to the monetary supply, i.e. new gold/new unit of currency that is not 100% backed by gold, the purchasing power of M is decreased. This is supposed to cause redistribution of economic resources from those who gain access to M later to those who gain access to M earlier. On the other hand, a non-anticipated increase of the money supply will cause an artificially altered interest rate level. Within the misesian system, this claim is possible because the interest rate represents a premium related to a potential delay of consumption or utilization of capital goods. This stems from the fact that the interest rate is derived from the time preference. Time preference is a necessity of action where a good in the present is always preferred more than an identical good of the same type and quality in the future. Time preferences affect the extent of societal savings, the interest rate, and therefore also the propensity to consumption. A new, non-anticipated, unit of money added by the banking sector then lowers the societal interest rate below its natural level. Why? Because a new unit of money (with an objectivized valuation) creates a perception of a higher propensity to save on the side of agents, which, however, does not correspond to the agents’ real time preference. In the case of a new unit of money not being created, the propensities to consume, save, and invest would not change – they would remain catallactic, or in other words, the interest rate would correspond to agents’ time preferences. Adding a unit of M, however, is supposed to cause a lowering of the interest rate, which will create a higher (artificial) propensity to investment, while the real higher propensity to save would be absent. Therefore, growth occurs that will at some point reach its limits – new investments will not be backed by new savings. At the same time, savings are used to finance projects that would not be financed under non-artificial circumstances. This will, however, only be found out after those projects stop delivering anticipated returns (this does not have to occur right away, but only after a number of subsequent waves of adding new units of M). This is then supposed to cause bankruptcies of economic projects.
Demand for money and money substitutes (IOU)
In the context of objectivization of the exchange value of money, not only IOUs of a fractional banking system, but even money itself in the form of gold should be problematic for consistent reservists – even to Mises it is only a ‘minor evil’. No good should correspond to a consistent reservist argumentation about money until 2009, when Bitcoin, whose supply is set to be finite, was invented. This is because it is new units of money/currencies, that face the brunt of the reservists’ criticism in the context of ABCT. Whether we are talking about gold or IOUs of a fractional banking system, new units do get added to the economic system.
Fractionalists, on the other hand, claim that new money and new currencies (IOUs) react to a so-called problem of money shortage, which the economic system uses to balance a monetary disequilibrium. The reservists’ criticism towards fractionalists, in the context of demand for new money/units of currency, is twofold. First, it addresses the problem of disequilibrium related to changes in demand for money, which the reservists consider to be causing misallocation of resources. Let us first look at what the fractionalists (S./W.) have to say about this topic:
(12) “In the long run, nominal prices will adjust to equate supply and demand for money balances, whatever the nominal quantity of money. It does not follow, however, that each and every change in the supply of or demand for money will lead at once to a new long-run equilibrium, because the required price adjustments take time. They take time because not all agents are instantly and perfectly aware of changes in the money stock or money demand, and because some prices are costly to adjust and therefore “sticky.” It follows that, in the short-run (empirically, think “for a number of months”), less than fully anticipated changes to the supply of or demand for money can give rise to monetary disequilibrium. … It is therefore an attractive feature of free banking with fractional reserves that the nominal quantity of bank-issued money tends to adjust so as to offset changes in the velocity of money.”
The reservists dispute the price disequilibrium and misallocation of resources. According to them, there is no reason why we should differentiate between short-term and long-term disequilibria. They claim that new money is not necessary since money prices will (through agents’ action) immediately adapt based on supply and demand of goods. In the context of individuals, a higher demand for money is supposed to be related to an increase of their individual monetary balances, which are connected to either decreasing the amount of goods bought or increasing the amount of goods sold. But these increases or decreases are automatically connected to changes in the prices of goods in the economic community. Reservists claim that an individual does not care about the general price level, nor the general purchasing power of money (fractionalist argument), but on the contrary, they always care about specific prices and the purchasing power of their own money. Since money is used for further exchange/purchasing of goods (money is not consumable), an agent’s action related to either restricted purchasing or increased sales and to anticipation of addition of new monetary units into the system has to then, according to them, affect the perceived increase/decrease of the purchasing power of their monetary balances, which means that the rate of an individual’s monetary balances always leads to an equilibrium. The demand for money must also be an effective demand, i.e. affected either by the restriction of purchasing of certain goods or increasing the sales of the goods which the individual provides. This is because Say’s law applies – all goods are bought for other goods, and no one can demand something without also supplying something else. However, emitting a new unit of currency does not correspond to this law.
The second problem is related to the fact that adding a new monetary unit created against an unchanged number of resources has no way of causing an increase in the number of these resources or prevent a decrease of the number of these resources. S./W. are in agreement with the reservists here and claim that time preference and demand for money are not related and a change in one does not imply a change in the other. This would mean, however, that new money is not related to a growth of savings and therefore with new resources usable for the creation of new capital structures. S./W. are subsequently trying to dodge this argument by claiming that holding money implies its later spending, i.e. that holding money delays consumption to a later time. To this, H./H./B. write:
(13) „Selgin and White try to escape from this conclusion by an ad hoc semantic shift, that is, in characterizing money as a future good. Essentially, their argument is that while increased money demand does not imply increased savings, it provides nonetheless for a larger loan fund, because money is held only to be spent “at uncertain future dates” (their emphasis), such that an increased demand for money is always and at the same time an increase in the demand for future goods.“
Reservists correctly state that money is not a future good. On the contrary, they are definitely a present good whose role is to remove uncertainty (not risk) in subjects’ actions – money, being the most tradable good (a good with the highest liquidity), allows subjects to best react to an uncertain future. In other words, a subject does not need to know their future needs, it is sufficient that they have money whose highest rate of liquidity will ensure that their needs will be satisfied. H./H./B. then write:
(14) „Accordingly, to the extent that he feels certain regarding his future, a man will want to invest in consumer and producer goods. Only to the extent that he feels uncertain about his future will he want to make the sacrifice referred to by Mises, that is, will he possibly want to invest in relief from any uneasiness felt concerning the uncertainty of his future consumption-production (income-expenditure) pattern. Hence, rather than indicating his increased willingness to sacrifice present satisfaction in exchange for future satisfaction, an increased demand for money demonstrates a man’s more intensely felt uncertainty regarding his future; and rather than being an investment in the future, an addition to his cash balance represents an investment in present certainty (protection) vis-à-vis a future perceived as less certain.“
According to the reservists, the disequilibrium which S./W. write about is a natural state through which individuals demonstrate a higher rate of uncertainty related to the future, and adding new money (gold) or units of currency is then necessarily distortionary.
In a footnote, H./H./B. also add that in principle, S./W. never answered the question of why demand for money changes, which in principle means that they do not explain (microeconomically) the change in individual subjective valuation of changes related to uncertainty about the future faced by individuals. It is this last criticism, which the reservists placed into a footnote, that is the key. The explanation provided by S./W. does indeed omit the microeconomical – individual – side of the whole problem.
An explanation and modification of the fractionalist stance towards demand for money has to, therefore, be started by explaining when and how demand for money, and subsequently for currencies (out of circulation, in circulation, and brand new) as products of the banking sector, arises. And that is exactly what we will attempt in the following section, which will correct the fractionalists’ inconsistent claims and through its explanations, a significant portion of the reservist argumentation will lose its justification.
Fractional system as a superior banking system
A core problem that logically led Mises to his conclusions about money is the problem of the description of interest rate through time preference. In a misesian system, an interest rate is a time preference of good M (money), which tells us that a present good M is always preferred to a future good M. It is necessary to point out that in the context of a misesian system, an interest rate cannot be connected to any other good than money! The discussion that Hülsmann started within the Austrian School about the interest rate as a value spread of ends and means was ‘ended’ by Hülsmann’s critique that Mises relates time preference only to money, and not to any other good, which implies that money is a good that is value invariant in time.
The problem faced by the misesian system of the interest rate is the question how can someone prefer good A today compared to good A (of an identical kind and quality) in the future, if we do not know the future and praxeologically nothing like a good of an identical kind and quality in time actually exists. Valuation of good necessarily changes over time. Hülsmann does correctly point out that the concept of time preference has to be considered only in the counterfactual context of action, i.e. as an imagination of good A in the future (not preference in time per se), but he also claims that it is not possible to derive the price of interest based on time preference.
Based on this, the misesian system also faces another inconsistency. Both Mises and Rothbard claim that the interest rate is a phenomenon that is indifferent to supply and demand of capital and capital goods. Contrary, it is a separate phenomenon which determines this supply and demand in the context of time preference. Mises explicitly talks about the original interest rate being a “ratio of commodity prices, not a price in itself”. A ratio of commodity prices foes not mean that these prices are determined monetarily – through indirect exchange and money. From this, we can imply that the interest rate must exist even outside of monetary relationships; before the advent of money. The same is claimed by Hoppe, who also criticizes Keynes’ description of the interest rate as a monetary phenomenon. How then, however, can the interest in the context of time preference be connected only to money? Would that also not mean that if there was no money, people would not utilize an interest rate?
For the purposes of our explanation, I will utilize the main conclusions and findings that are explained in more detail in my related works. In them, I explain the problem of interest rate and the concept of how money gains its purchasing power in more detail. For the purposes of this article, let us start with summarizing my main findings related to the theory of the interest rate and the theory of an inter-subjectively perceived value of money.
In the Theory of the Interest Rate, I am trying to convince the reader that whether or not we are dealing with a monetary or a non-monetary economy, humans, through the interest rate, value the exchangeability of goods in a time continuum. From this follows that humans face uncertainty related to the future. They overcome this uncertainty through accumulating some sort of portfolio of goods, which we can imagine for example as owning a spade and a hoe for tilling land, but also a bow and arrows for hunting, and a house and wood for heating and overcoming adverse weather conditions etc. Within this portfolio, there also existed goods, which are not being accumulated for their explicit use value to the subject itself, but for their potential exchangeability in time – e.g. a portion of an apple harvest can be held by the subject for the purpose of exchanging it for wood, in case the wood currently owned by the subject runs out in the middle of winter.
If we want to put is as simply as possible, this means that I will lend (exchange) labor or a spade to another subject, in exchange for the other subject providing me with e.g. apples after a certain agreed upon time. I also (automatically) incorporate a value spread in the form of interest rate into this exchange, through which I estimate the success/failure of whether the apples will be exchangeable in the future (useful to other subjects, or to the myself in the context of my portfolio), and whether the other subject’s project is viable, i.e. if it is realistically possible that the other subject will produce those apples. The interest rate is therefore a value spread, through which subject X, in the context of subject Y, judges whether or not to deal with potentially adverse future by providing (capital) goods from his portfolio for Y’s project (which will result in apples being added to X’s portfolio at the end of the deal), or if it makes more sense to keep hoarding (X will not lend the spade or labor). Subject Y, on the other hand, sees the interest rate as a spread in the context of X between whether it is more worthwhile to use X’s goods which Y does not have today in exchange for fulfilling an obligation (apples) in the future, or whether it is more worthwhile to face the adverse future through higher savings. This concept is clean of logical problems because a subject does not evaluate a specific good A (apples that do not exist yet) in time t against a specific good A´ (existing apples) in time t+1, but rather evaluates the impact that his decision (lending a spade) will have on his portfolio which he uses to overcome future adversity; as if he was asking: “will I be better off in the context of my whole portfolio if I keep hoarding the spade, or will I be better off in the context of my whole portfolio if I lend it and gain apples in exchange, or some kind of other return from selling the apples”. I.e. he evaluates a ratio magnitude (portfolio change) in time. The other subject then asks a perfectly inverse question. In the context of my interpretation of the theory of the interest rate, the interest rate is a construct created in an exchange that has a purely mathematical character and is therefore time invariant in the context of value changes,.
The owner of the capital goods (creditor) therefore evaluates options – hoarding vs. dishoarding of good(s) today, against the other subject’s offer of the results of his economic activity later in time, which the creditor will use to enrich his portfolio in the future. The evaluation of this kind of exchange contains its fulfilment in time (the creditor prefers an earlier fulfilment of the exchange than the debtor), the legal terms of its fulfilment (collateral, or a rule that will ensure the elimination of loss in case of a failed exchange) and the agreed upon amount of interest, which all contribute to determining whether the offered project (growing of apples) will or will not be realized.
This concept of the interest rate corresponds to the fact that when dealing with the interest rate, we are dealing with a value phenomenon which is independent of savings, while it is a phenomenon related to exchange, i.e. an indirect satisfaction of needs of at least two subjects in a time continuum. This way we removed the inconsistency of the misesian interpretation of the interest rate based on time preference. The concept allows us to avoid claiming that we apply an interest rate on a good of an identical kind and quality (money), actually we are able to apply it to any goods that are being exchanged, and it also allows us to avoid claiming that the interest rate is a monetary phenomenon. The interest rate is an exchange phenomenon. And exchange is facilitated by money.
In my related works I then argue that the purchasing power of money is connected primarily to exchange in time, i.e. with facilitating an indirect way of satisfying subjects’ needs in a time continuum. In the abovementioned articles, I have shown that money gained its status on the basis of being the best at reflecting changes and the level of the interest rate in the context of facilitating an additional unit of exchange in a time continuum. Money is therefore a good, through which subjects react to a new problem of facilitating, in a time continuum, an exchange that includes an interest.
In the articles, I claim that it is as if subjects, during specifically solving a problem of exchange, create a new abstract layer of thinking about the exchange in time per se. To simplify, the reader can imagine this as the subjects leaving the bottom layer of capital goods and create a higher abstract layer above it, in which they start solving only one thing – exchange in time per se. They chose a good to put into this abstract layer that is advantageous, both from the point of view of the of the creditor and the point of view of the debtor, to facilitate their exchange in different times and economic contexts. This abstract layer therefore gains new concrete forms – it is as if it started to live its own life, with its own rules, while it explicitly affects the bottom layer of capital and consumer goods. Within this layer, subjects are solving a separate problem of exchange in the context of the amount of exchanges, the extent of exchanges, the time frame of exchanges, as well as the conditions of exchanges in the context of not fulfilling the conditions of the exchange and the influence of the circumstances arising from not fulfilling the obligation related to the exchange. All these aspects have an effect on the bottom layer of goods and subsequently they affect the lower layer of exchange relationships in the form of a concrete form of capital structure or other societal relationships; i.e. what will happen if the exchange is not fulfilled. That this is a stand-alone problem per se is also proven by the fact that a given exchange can collapse at any time, i.e. the debt stemming from the exchange does not necessarily have to be fulfilled. Therefore, we are definitely dealing with a stand-alone phenomenon as such.
With the creation of this layer of thinking about economic phenomena, subjects start to explicitly realize the existence of the interest rate, which, until then, they used intuitively during exchanges in time, and which they can represent in calculative way through money when comparing exchanges in a time continuum with exchanges in a particular time, on which they do not apply the interest rate. That this is a separate and new abstract layer of dealing with interpersonal economic relationships is also shown by the fact that in this layer, there is a stand-alone ‘competition’ for which good is the most viable for facilitating the given abstract relationships. At the same time, new forms of dealing with these relationships emerge around this stand-alone abstract layer in the form of banking and its products. This is because we are dealing with nothing else but resolving debt relationships in time, where these relationships are resolved with money as such, and also through clearing of debts in space among individuals and in time.
From the point of view of a traditional misesian approach, this is a different way of explaining the purchasing power of a medium of exchange. While Mises, with his regression theorem, looks for something like a beginning of the said higher layer, our explanation shows that such beginning does not exist; subjects create a new and abstract layer of relationships continually and even spontaneously as they continually solve the problem of exchange in a time continuum.
The purchasing power of money therefore stems from how well a certain good reflects the correct level of the interest rate, and also an additional marginal unit of exchange (indirect satisfaction of needs). Money is therefore a good through which subjects react to interest and to the need of an additional unit of exchange. Next, we will show what these conclusions mean for our discussion.
Demand for money and money substitutes (IOUs) subject to a (fully) subjective valuation
One of the key explanations why a fractional banking system is a superior banking system is a question – correctly asked by Hoppe, Hülsmann, Block – of demand for already existing money (already mined gold) and currencies of the banking system (IOUs) in circulation, and also the demand for new money (newly mined gold), or for lowering the monetary reserves in a fractional banking system, which enables the banking system to create new currencies (new IOUs). The answer to this correct (microeconomic) question, i.e. what changes demand and causes changes in demand for money at an individual level, is, according to the arguments we presented, as follows: the changes in demand for money stem from changes in perception of the interest rate and mutual needs of subjects to satisfy their needs in an indirect way in time; i.e. a new monetary unit solves the problem of facilitating an additional marginal unit of exchange per se in time. At a societal level then, in case the interest rate is falling, market forces will cause an addition of new monetary units into the economic system (the demand for money that is supposed to facilitate an additional unit of exchange rises). If it is rising, market forces will cause a diminishing of addition of new monetary units (the demand for money falls, as it does not have to facilitate an additional unit of exchange).
An attentive reader should notice that the whole process is, whether on an individual or banking level, invariant from the rate of societal savings; it is as if those are being dealt with in a lower layer of economic relationships. An addition of a monetary unit (accumulated outside of the banking system, or completely newly created/mined) does not, therefore, create a perception of a higher rate of societal savings that enable the realization of some economic project. An addition of a new monetary unit is a reaction to a higher rate of optimism in the context of financing marginal economic projects that it was not possible to finance before the lowering of the interest rate. This means that our explanation is based on a given and actual rate of savings in a community. A new monetary unit which reacts to the change of the interest rate does not by itself change anything about the sum of savings. What it foes change, is the subsequent utilization of savings with all related consequences in the context of an inability to revoke a given decision to finance a marginal business project. A re-added, or a completely new monetary unit is used to facilitate an exchange of existing savings, which then become capital goods, through which past-produced goods will be appraised. Their appraisal in a given monetary unit also enables us to find out now whether past economic projects (former business plans) used to produce present capital goods were meaningful, i.e. whether they were profitable, or incurred a loss. At the same time, it is a continuous, repeating, and never-ending process. In the monetary sphere, as in any other market, humanity moved from a state of using money at an individual’s level to more sophisticated methods of finance at the level of industry professionals – so called market makers. Whether it was banks, who first served as custodians – storages of gold, or even then necessary related activity connected to the storage of other goods, i.e. providing a commodity to the market in a timely manner. The banking sector is no exception.
What kind of market – making do banks then realize? The classical view talks about facilitating deposits and credit. In principle, however, it is a market making of the interest rate and facilitating additional indirect satisfaction of subjects’ needs in a time continuum. Since the interest rate is a value phenomenon whose changes and levels depend on individuals’ perception of this phenomenon, we can never know its exact value. We have to explore it.
Determining the level of the interest rate is related to the decision to realize an exchange in time, i.e. using modern terminology to provide credit against which a currency (IOU) is created. A bank thus reacts to a higher demand for money. Here it is necessary to realize that it is the bank’s decision to finance a business activity which relatively lowers the level of the interest rate, not the addition of a new monetary unit itself. The addition of a monetary unit is a related step that reacts to the decision. And the decision itself is either on an individual level or at an institutional level of a market maker; this way, through participating/non-participating in an exchange in time, a price – level of interest – is also generated (problem that Hülsmann was dealing with when working on the misesian problem within his Theory of interest). The important question is whether the decision to lower/increase the interest rate at the institutional level of a market maker is legitimate, however the very same problem is also faced by subjects at an individual level.
A bank does not explicitly know this, and neither does a financed business subject with an economic project or an individual. Whether or not this decision is relevant, must be discovered in the business process realized by the bank. During the realization of this discovering, the bank in principle face three market counter-forces. The first is withdrawal of money (gold) from the boak or even from the banking system by the marginal client. This is a reaction of the marginal saver who, in case of too much optimism of the bank in the context of the interest rate, stops being the bank’s client and withdraws money (gold) either from the banking system or from the bank itself, depositing it into another bank. This cause a stoppage in the process of financing an additional marginal economic project either in the context of the whole banking system, or in the context of the individual bank that lost its client (under otherwise unchanged circumstances). The second counter-force has the form of diminishing the extent of money production – mining companies and mints decrease the production of gold, which is caused by capital goods ‘flowing’ into other sectors where they are more productive, and not into the money production sector. The third is competition itself, i.e. other market makers who use a relatively higher interest rate to attract new deposits, or they have better economic results than the given market maker. Better results of other banks are also related to a higher purchasing power of IOU of a successful bank, either against 100 percent or fractional reserves.
Both in the 100 percent and the fractional system, the process of discovering the level of the interest rate is not related to the extent of economic savings. In both systems, the discovering of the interest rate is a process related to the reaction of a bank (or banks) to changes in the demand for marginal exchange in time facilitated by money. The question that needs to be answered in the context of the fractional system is why can IOUs of a bank with fractional reserves be used to solve an identical problem that money is used to solve (correct reflection of the interest rate and its changes and facilitating a marginal unit of exchange). An incomplete view is that since a bank emits a currency (IOU, clearing title), against which the client can demand money (gold) at any time, it is as if the process of discovering the interest rate is identical because currency (IOU) is viewed as equivalent to gold.
More accurately though, the creation of IOUs is another extension of the monetary layer of economic relationships. This is because IOUs are chargeable/clearable and tradeable obligations, which depend on the exchangeability of that which they represent, or in other words, depend on the liquidity of the goods against which they are created. And since Say’s law that goods are exchangeable only for other goods applies, and IOUs allow for chargeability of exchange of goods in space (among humans) and time, we can use IOUs as well to reflect the interest rate and its changes without the need to necessarily use money. An IOU then gains purchasing power because, on one hand, it is derived from money, i.e. it is possible to settle an IOUs with money – gold, which is a final eliminator of debt in a system of fiduciary media (or it is only dependent on the exchange rate against other IOUs without a final eliminator of debt – system of fiat money), and on the other hand, it is also derived from the extent of successfulness of economic projects (their exchangeability) on which resources were spent and whose activation the given IOUs facilitated. The fact that IOUs of a fractional bank can be used for an identical activity as money is therefore related to the bank’s business activity itself, through which it provides a service of institutionalization of facilitation of a marginal unit of exchange in time. There definitely exist an economic space for the activity of banking institutions, since during an exchange in time, we are dealing with estimating the future, estimating the optimal time length of the exchange, as well as enforcing the agreed upon conditions of the exchange in time. At the same time, it is not about a business activity of a bank in one particular economic project, but about a portfolio of projects, which results in a relatively higher rate of stability of the tradability of the said IOUs, compared to if the given projects were concentrated only in one economic sector, or geographic region. The success of the banking activity then increases the value agio attributed to the emitted IOUs and conversely, a failure causes a value discount to be applied to the IOUs.
Selgin considers this to be one of the biggest positive contributions of fractional banking, when he points out that economic activity can be focused on other productive activities as well, not just the creation of money per se. A second advantage is a quick reaction of the market maker to changes in demand for money stemming from changes in perception of the interest rate and a stabilization of its volatility, as well as the facilitation of marginal exchange in time. It could also appear to the reader that we are dealing with some superfluous solution that says that we do not have to mine that much gold and save resources used on mining, or that the time problem between demand and physical supply of gold (money) is removed. It is not this, which is fascinating. Let’s look at the positive contribution from another perspective – a perspective of a higher rate of exchangeability of goods between themselves without any need for money (gold). Goods themselves, through their appraising with currencies (clearing titles) gain a much higher liquidity and mutual exchangeability. From an economic point of view, this innovation can be compared to the invention of money itself.
Superfluous arguments and problems – the risk of fractional and 100 percent system, interest rate manipulation, the problem of time mismatch of deposits and credit. The different riskiness of fractional and reservist banking
One of the often-used arguments against fractional banking is based on the higher riskiness of the fractional system, which stems from fractional banks being exposed to a higher risk of withdrawing money (gold) from the banking system (bank runs), problems with liquidity, or allying themselves with the political powers. The higher riskiness of the system does indeed sound intuitive. Even the fractionalists agree with this statement, while explaining the benefits of agents undergoing said risk. For example, Selgin writes:
(15) Fractional reserve banking is undeniably riskier than one hundred percent reserve banking. The question is whether the extra risks are outweighed by benefits. I have already argued that, in the eyes of many past and present bank customers, fractional reserve banking does seem to be worth the risk.
However, after a more detailed analysis, we cannot talk about a higher or lower riskiness of one or the other systems with such certainty as both the fractionalists and reservists exhibit. This is because there is no logical reason why a 100 percent system should face e.g. a lower risk of money (gold) withdrawal from the system or should not face bank runs. Under any circumstances, a bank is always a third party and it is not its trust in its business activity but its business successes/failures that affect whether it is 100 percent or fractional. Or are the reservists trying to tell us that, through some kind of miracle, a bank with 100 percent reserves is a priori more prudent and honest than a bank with fractional reserves? An interesting related question is also whether a bank run would be triggered if a bank declaring 100 percent reserves lowered them e.g. by 1%, or whether it would trigger if the bank would hold a portion of the reserves in the form of futures contracts without applying a value discount on the given object of reality (IOU), or whether it would be triggered if said reserves had some completely different form of IOU – for example just the form of warranties of entrepreneurs to repay their debt in gold, or the form of shares of a gold mining company that e.g. pays their dividends in gold? What really is a 100% backing, and if the clients of a bank decide to accept other forms of ‘backing’ than gold directly, will the reservists consider their behavior as unnatural?
It is also not clear why banks with 100 percent reserves could not cartelize their business in the same way as the reservists argue fractional banks would. This argument falls the same whether we presume a free competitive market, where it is impossible to think about cartelization, or whether we presume a regulated market, which does lead to cartels, but the reservists do not state any arguments why banks with 100 percent reserves would not create them.
We also cannot confidently claim that a fractional bank provides riskier credit than a 100 percent one, and that a fractional bank would, due to its lower rate of reserves, grant more credit than a 100 percent one; although even with a potentially lower credit activity of a bank with 100 percent reserves, we cannot explicitly presume that the system as a whole will face lower risk. The same doubt applies to the problem of liquidity that stems from this. There is no logical reason why a 100 percent bank should not have an identical problem with liquidity; the difference in this case is only in the reservists’ claim that while in the 100 percent system, clients are aware of the risk, in the fractional one, they are supposed to not be aware of it. This, however, is an empirical argument which can apply under some circumstances but not others, and historians can have different views on it.
If a fractional banking system does face something, it is a higher rate of competition and also the fact that the marginal saver in the fractional system wields proportionally ‘more power’ over the fractional bank compared to a banking system with 100 percent reserves, because he can cause a bank run on it more easily.
Interest rate manipulation
The supposed interest rate manipulation is said to be another problem of fractional systems. This argument does not stand on weak foundations only because, as we explained earlier, money and currencies react to the interest rate, but also because of the basis of those claims itself. This stems from the fact that the profitability of a bank is not related to the interest rate, but to the spread between the interest rate on deposits and the interest rate on the credit it grants. Or in case it does not participate in the credit market, the spread expressed as the amount of fees earned for storage and the costs of storage. The bank is, in principle, indifferent to the particular level of the interest rate. The banks goal is not to lower the societal interest rate per se, but to increase its spread. It’s ideal state is to provide zero interest on deposits and require a maximum interest for credit (which is one of the reasons why a fiat system is attractive to banks and they are incentivized to collaborate with the political power; it is because creating an IOUs in a fiat system has zero costs – there is no need to establish an interest rate on the deposit of money – gold). With zero interest on deposits in a free system however, it has to ask for a fee for storing money (gold) that is higher than the costs related to storage, while facing the problem of attractiveness to clients, which are demotivated by the low interest. It is therefore the marginal saver, and its own costs and business success/failure which create the bottom limit of the spread, and from the other side, it is limited by the decision of the marginal entrepreneur to ask for and gain credit with the offered interest rate and under given legal conditions of exchange, and also by competitive activity of other banks that limits the amount of the interest rate and the possible fees for the storage of money.
Maturity mismatch problem
This problem is also superfluous. It is important to point out that there is a difference between depositing money (gold) into the banking system and the creation of IOUs of the banking system. By depositing money (gold), the clients give bank a real asset against which the bank will give them an IOU = currency. In a fractional system, a bank could also lower the amount of reserves in gold, i.e. emit an IOU against an economic project rather than against gold. The creation of currencies = IOUs, therefore, has a different character. It is a book-keeping process of some newly created IOU on the bank’s balance sheet. And that is both in the bank that emits the debt (currency/obligation) or in a different bank that accepts the given type of obligation and is a part of the given banking system. In the banking system as a whole then, debt (currency/obligation) is continuously created and eliminated, i.e. one debt used to finance an economic activity is eliminated by another debt, or a debt created later in time, used to finance another economic activity which has to be more productive. And this is an ad infinitum process. That is possible because a free market economy is not a so-called zero-sum game, i.e. the profitability of the financed economic projects, which causes the attribution of a value agio to currencies and is a result of productive economic activity, outweighs the unprofitability of the financed economic projects, which causes the attribution of a value discount to currencies and is a result of a negatively productive economic activity. At the same time, the competition in a free banking system ensures a state, where a bad estimation of economic activity causes a bank to be eliminated from the market.
This means that the activity of fractional banks in the context of the maturity mismatch problem cannot be subject to the conclusions of ABCT. That is because the important thing to ABCT itself is the mismatch of capital savings and investments (in the bottom economic goods layer) and not the relatively perceived time mismatch of money savings and credit (in the upper monetary layer). That means that considering the continual economic process, the problem of time mismatch will be eliminated by new monetary savings of other clients, or new creation of IOUs against new supported economic projects that are subsequently booked in the balance sheets of the banks in the banking system. If we also look at this problem from the point of view of the whole banking system and not an individual bank, the problem loses its substance as well.
Conclusion – A fractional vs. a 100% banking system
The purpose of this article was to show that a fractional banking system is not a fraudulent system and that it is an economically more preferred system to a system of 100 percent reserves. I believe that I have presented a non-trivial number of arguments to support this claim. This does not mean, however, that these two types of banking systems could not coexist in the context of client’s preferences. It also does not mean that banks that are newly entering the free market could not start their entrepreneurial activity as banks with 100 percent reserves and later they would become fractional banks These possibilities and conditions will be, in the end, determined by the clients of the bank.
An attentive reader may have noticed that the banking system in this work is presented as an evolutionary tool. The banking system is built upon what we described as the monetary layer of economic relationships – by coming into being, it is as if this layer of relationships has started living its own life.
In principle, we are dealing with the following description of an evolution. Before the advent of money, subjects were facing the problem of realization of exchanges in a time continuum. They solved this particular problem by a new abstraction in the form of money, that “pulled up” the problem of exchange (indirect satisfaction of subjects’ needs) to a new and abstract layer of relationships, where exchange per se is dealt with. With the formation of this new layer, it is also starting to evolve on its own. Multiple goods started to be used as media of exchange within it, which led to the human community encountering new problems related to the quality of a medium of exchange. This happened because through money, people started to realize the existence of new and until then implicit and unconsciously applied phenomena such as interest. That is why they tried to identify goods in the competitive process that would enable them to more accurately react to this phenomenon. And so, they started using precious metals as media of exchange. That, however, again brought about a new reality in the form of new problems – the need for a quicker reaction to the demand for new exchanges and therefore a correct reflection of the interest rate. Humanity therefore came up with a possibility of clearing debts expressed in money, which allowed the emergence of new, more abstract, objects of reality in the form of currencies (IOUs) – fractional banking emerged. From this point of view, even the fiat system is an evolutionary state, where humanity is experimenting with the option of politically governed and regulated management of debts (politically regulated system of banking) and some form of not using money (gold) within the system (even though gold is a part of the system – it is stored in repositories of central banks and they create currency against their assets, clients themselves are unable to withdraw gold; for now, they are however able to purchase it outside of the system).
An attentive reader could also notice that the banking system in this paper was introduced as a system based on exhibiting the entrepreneurial ability of the bank and banking sector to manage credit-related socio-economic relationships. As was shown, the creation of IOUs itself, has no way of causing unnatural (non-catallactic) distortions in a free banking system. The error rate of banks when managing credit relationships can only be related to a catallactic form of risk, i.e. the entrepreneurial discovery of a solution to a problem of economical utilization of limited resources with unknown future.
Matúš Pošvanc, Slovak version of the paper was published on 15.07.2018.
Appendix: Bitcoin and cryptocurrencies – an ontological view
Bitcoin (and other so-called cryptocurrencies) is not and as such will never become money – or ‘digital gold’. The marketing-influenced belief of today’s crypto-enthusiasts that Bitcoin is the new digital gold stems from two things – an erroneous belief that any monetary reserve is sufficient for any economic community, and an economically naïve belief that since Bitcoin is usable for payments, it must be money. Bitcoin really does share some characteristics with money. However, it has a limited supply – a final amount that is known in advance. As we have shown, money as unit of account gain their purchasing power on the basis of their ability to reflect changes of the societal level of the interest rate and are able to facilitate marginal exchange in time. Cryptocurrencies, therefore, not only practically but also theoretically, lose the possibility of ever becoming money (unit of account). They will never be able to facilitate, in a relevant way, relationships between debtors and creditors. Bitcoin, or any other cryptocurrency, cannot by definition even be a currency – it is not an IOU that is created against a receivable as a product of the banking sector.
So, what is Bitcoin (or a different cryptocurrency)?
Applying an ontological view, we can, in my opinion, consider it a software – a distributed and decentralized shared database of records – that ensures informational consensus in a unique way (e.g. Proof of Work) in a given network, and is therefore ‘trustless’ (does not require the need to trust a third party), while the access to the network is by definition ‘permissionless’ (anyone can connect to the network and contribute to the process of achieving consensus in it). Blockchain functions as a transparent registry, or a transparent ledger, in which the history of all transactions that ever occurred in the system is recorded. Its history is immutable, while the immutability is protected through cryptography. Considering that it is a database – a record of information – it is not something that has never been used by people before. The form of the system is, of course, differ from what people have been used to before. The database of records is not created by a third party, an individual company, or a provider of records, but it exists on the basis of an activity of certain subjects (in Bitcoin it is the so-called miners).
From this point of view, Bitcoin resembles more of a commodity. It exists, and its existence is dependent on spending resources and also on activity of people. But it exists in a ‘cyber-space’, and therefore is not a natural thing/phenomenon. It behaves indifferently to the goals of an individual. It is therefore an abstract thing dependent on the simultaneous activity of many people (community), while it also has indifferent characteristics independent of the community (cryptographically ensured correctness, limited number of units, or rather a precisely defined number of units), although at the same time (in case of sufficient consensus) these characteristics can change (e.g. altering the cryptographic elements, changing the way consensus is achieved and how the system functions, adjusting the number of total units, etc.). From an ontological point of view, it is therefore a new kind of an abstract thing, that humanity did not know before, or it only described it theoretically.
Are crypto-systems usable in the financial system?
I think that the answer is yes. And I think so because of the fact that e.g. Bitcoin is based on the principle of a transparent ledger, that anyone can use without the need for a permission and the entries in it are immutable. The technology therefore enables a record about the creation and elimination of debt in conjunction with automating some activities connected to the creation and elimination of debt through so-called ‘smart contracts’, i.e. software based on the principle of IF something occurs, THEN this will happen.
Questions about how to potentially organize an automated management of debt, i.e. automated banking activity, will therefore be questions about the possibilities of programming decentralized applications (decentralized banks) and about determining how these applications should, for example, approach risk when issuing credit, automatically react to changes in risk, take measures to maintain a certain level of risk, automatically approach the extent of reserves in the form of e.g. gold, level of interest, time conditions related to the issuing of credit, gaining information about the economic reality (through IoT sensors, so called oracles), or setting rules related to enforcing debt repayments and the realization of this enforcement through IoT and, of course, with the necessarily related generation of free currencies. Are we therefore about to enter a new era of banking? Thinking about these evolutionary possibilities and paradigmatic changes will be the topic of my next articles. Although, I am already not hiding my excitement about these possibilities.
 Pošvanc, M. (2017/2018). Theory of the Interest Rate. A Revision of the Austrian Approach. WWW DOCUMENT <http://viagold.sk/teoria-urokovej-miery-revizia-rakuskeho-pristupu/>
 Pošvanc, M. (2017/2018). Critique of the Regression Theorem. Gold and Silver as Optimal Non-Rigid Money WWW DOCUMENT <http://viagold.sk/kritika-regresneho-teoremu-zlato-a-striebro-ako-optimalne-a-nerigidne-peniaze-finalna-a-kompaktnejsia-verzia-clanku/>
 Kinsela. S. The Great Fractional Reserve/Freebanking Debate. WWW DOCUMENT <http://www.stephankinsella.com/2016/01/the-great-fractional-reservefreebanking-debate/>
 Salerno, for example, claims that this problem is of lower importance. See Salerno. J.T.: White contra Mises on Fiduciary Media. WWW DOCUMENET <https://mises.org/library/white-contra-mises-fiduciary-media>; the reader will see, however, that both problems are not reflected correctly by the Mises-Rothbard branch of the Austrian School. Compare also with Cachanosky’s opinion that Mises cannot be explicitly categorised under this reservist branch of the Austrian School. See Cachanosky N. Mises on fractional reserves a review on Huerta de Soto’s argument. WWW DOCUMENT <http://www.cevroinstitut.cz/upload/ck/files/Casopisy_clanky/12_05_NPPE_Vol7_06.pdf.> . As we will see later, the reservists, however, use a significant portion of Mises’ economic argumentation about the banking system.
 Selgin, G. White, L. (1996): In defence of Fiduciary media – or, We are Not Devo(lutionists), We are Misesians. WWW DOCUMENT <https://mises.org/library/defense-fiduciary-media%E2%80%94or-we-are-not-devolutionists-we-are-misesians> page 85.
 Definition of ontology. Oxford dictionary. WWW DOCUMENT <https://en.oxforddictionaries.com/definition/ontology>; my favourite ontologist is Barry Smith, see WWW DOCUMENT <http://ontology.buffalo.edu/smith/>
 Hoppe, H. with Hülsmann, J.G. Block, W.: Against Fiduciary Media. WWW DOCUMENT https://mises.org/library/against-fiduciary-media-0, page 4
 Hülsmann, J.G. Free Banking and the Free Bankers. WWW DOCUMENT <https://mises.org/library/free-banking-and-free-bankers> page 7
 Hoppe, H. How is Fiat Money Possible? or, The Devolution of Money and Credit. WWW DOCUMENT <https://mises.org/library/how-fiat-money-possible-or-devolution-money-and-credit>, page 56
 See e.g. Selgin. G: Theory of Free Banking. str. 22. WWW DOCUMENT <http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf>. Selgin writes: „Of even greater significance than Ruritania’s one-time savings from fiduciary substitution (the replacement of commodity money with unbacked inside money) is its continuing gain from using additional issues of fiduciary media to meet increased demands for money balances. (italic added)
 They would, for example, be objects of reality that are indifferent to the banking sector and would not be anyone’s IOUs.
 Difference lies in the in the institutional background of economic processes which provides to money per se and money substitutes their purchasing power. See my other works about the problem of purchasing power of money; English version of papers are available on https://posvanc.blogspot.com
 See Hoppe, H. with Hülsmann, J.G. Block, W.: Against Fiduciary Media. WWW DOCUMENT <https://mises.org/library/against-fiduciary-media-0> (pages 30-31); A similarly valid criticism as the exchange of a warehouse receipt, is the criticism of H.H.B. about the problem of ‘proof from existence; S.W. defend the fractional system in this way, i.e. the fact that fractional banking existed historically proves its usefulness. The criticism is raised in the context of an incorrect use of the argument from S.W.’s side, and it is valid. However, as the reader will find out later, it is again irrelevant because we will show a different economic-logical argument for defensibility of the fractional system.
 White points out that because we are dealing with certificates of gold (money) deposits into a warehouse for a fee, their tradability is limited because of the problem of receiving the fee from the owner of a given certificate, because if the certificate was used as currency and changed owners often, the warehouse would face a problem when asking for the fee to be paid. This argument has more of a technical character and is not necessarily unsolvable (see for example today’s system of the Goldmoney company). That is why I would consider it superfluous today, and only use it as a supportive argument to the historical evolution of banking towards a fractional system. See White, L. (2003): Accounting for Fractional-Reserve Banknotes and Deposits—or, What’s Twenty Quid to the Bloody Midland Bank? Str. 425. WWW DOCUMENT <http://www.independent.org/pdf/tir/tir_07_3_white.pdf>
 With ‘fiat money’, we are also dealing with an obligation, whose value is only derived from the underlying asset. The central issuer has a right to issue a monopoly currency against assets on its own balance sheet. Normally, these also include gold. The banks in the system then do not hold gold as their reserves themselves. A general obligation (currency) is at the same time ‘backed’ by a promise of the government, or some governmental institution like a central bank. A central bank then can, but does not have to hold gold, the withdrawal of which by the clients is questionable and likely impossible. Here, it is explicitly impossible to agree with Hülsmann, who says the following about ‘fiat money’ (page 7): „Only irredeemable notes are money-that is, fiat money. They are valued separately because they can be used independently from other goods. “in Hülsmann, J.G. Free Banking and Free Bankers. WWW DOCUMENT <https://mises.org/system/tdf/rae9_1_1_2.pdf?file=1&type=document> Fiat money gains its valuation in a way identical to any other IOU in the banking system.
 We must stress once again that the difference lies in institutional background of the processes behind the purchasing power of money and banking sector IOUs. Banking system is evolutionary superstructure over the money. See my other works on the topic of purchasing power of money; in English see https://posvanc.blogspot.com
 De Soto, A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian School Perspective. WWW DOCUMENT <https://mises.org/system/tdf/rae8_2_2_2.pdf?file=1&type=document>
 Ibid. page 30
 Selgin, White (1996): In defence of Fiduciary media – or, We are Not Devo(lutionists), We are Misesians. WWW DOCUMENT <https://mises.org/library/defense-fiduciary-media%E2%80%94or-we-are-not-devolutionists-we-are-misesians> page 89 – 92
 The creation of ‘deposits’ is nicely and simply described in McLeay, M. Radia, A. Thoma, R.: Money creation in the modern economy. WWW DOCUMENT <http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf>. Currency deposits are created through the granting of credit, and not vice versa. It is a fundamental difference in the understanding of how the banking system functions from the point of view of Austrian economists. What can be criticized about this description from an ontological point of view is that we are not dealing with deposits, but with clearing titles. The term ‘deposit’ creates a confusion in the argumentation because it indicates a deposit of money (gold) into the banking system. This study nicely shows that using the same terminology to describe two different objects of reality creates room for incorrectly conducted argumentation.
 In the context of a potential objection that, from a historical point of view, the fractional banking system was created as a fraud, it is necessary to point out that the purpose of this work is not to historically evaluate this claim, but to logically argue whether a fractional system is logically possible and legally and economically viable. In my view, the works of Selgin and White, however, sufficiently prove that even from a historical point of view, it was not a fraud, and as long as the system wasn’t unnecessarily regulated, it also proved its economic resiliency. Although, objections of some reservists (see e.g. Hülsmann, J.G.: Legal Tender Laws and Fractional-Reserve Banking. WWW DOCUMENT < https://mises.org/library/legal-tender-laws-and-fractional-reserve-banking-0>), that point out the historical preference for fractional systems of the judicial and political authorities can challenge the given examination and raise questions; identically, it is possible to use de Soto’s historical method, in which he bases his arguments, for example, on judicative of Roman law, or the European continental legal tradition. From the point of view of logical argumentation, however, these empirical procedures are irrelevant, because they are a part of a historical method of inquiry. It is also necessary to point out that reservists themselves, as far as a potential practical realization of their theory goes, suggest making a ‘thick line’ after the past, and focus on practical solutions of organizing social relationships in the future. See e.g. Kinsella, S. (2014): Mises, Rothbard, and Hoppe on the “Original Sin” in the Distribution of Property Rights. WWW DOCUMENT < http://www.stephankinsella.com/2014/10/mises-rothbard-and-hoppe-on-the-original-sin-in-the-distribution-of-property-rights/>. Simply put, this means that the past is in the past. It is forever gone, and it is necessary to look into the future.
 Compare, for example, with a biased (reservist) type of description used by Karpiš. J. in Bad Money. Karpiš uses an example of finding 100 EUR, which will generate new money with a value of 9,900 EUR. Chapter: Kde sa zlé peniaze rodia, komu slúžia, ako zanikajú – exkurzia bankovým systémom.
 See Salerno. J.T.: White contra Mises on Fiduciary Media. WWW DOCUMENET <https://mises.org/library/white-contra-mises-fiduciary-media>
 This argument also applies to gold itself. From this point of view, gold is acceptable by the reservists because its increase in quantity in an economic community is relatively low – and if we adjust for costs of mining, they consider its supply to be almost rigid. An ideal commodity that could be used here could be Bitcoin – an actually rigid internet commodity, decentralised distributed database, computer program. I expand on the problem of Bitcoin in the article’s appendix.
 Rothbard, M. Man Economy and State: “To put it in another way: without a price, or an objective exchange-value, any other good would be snapped up as a welcome free gift; but money, without a price, would not be used at all, since its entire use consists in its command of other goods on the market. The sole use of money is to be exchange for goods, and if it had no price and therefore no exchange-value, it could not be exchanged and would no longer be used.”
 The reader should already notice the inconsistency of the reservist branch of the Austrian School. As we have shown earlier, these authors explicitly differentiate between money and money substitutes and fiduciary media. However, in their economic description of reality they talk about newly created monetary supply no matter which object of reality they are dealing with – gold, money substitutes, but even fiduciary media and, mutatis mutandis, also fiat money. They do not specify different types of economic necessities for the different objects of reality, which would be appropriate since they are dealing with categorically different concepts (compare with quotations 5, 6, and 7 in this text). Approaching money, money substitutes, fiduciary media, and fiat money in an identical way implies that there is no difference between the given objects – which reservists themselves deny with their statements. There is therefore a clear inconsistency. Either we are dealing with identical objects of reality on which we can apply absolutely identical economic attributes (which is clearly not the case), or we are not dealing with identical objects of reality and we should adjust the appropriate economic descriptions and relationships accordingly.
 For the exact formulation of this thought process see e.g. Rothbard’s quote in footnote 25
 The problem stems from the fact that when he describes the process of money creation through the regression theorem, Mises psychologises the process of how money gains value; in one moment in the past their price (purchasing power) was derived from their industrial price. Which is logically impossible without Mises objectivising the price and value of the good ‘money’ in time. Mises with the regression theorem simply does not explain how money gains its exchange value while in the said moment, he derives its exchange value from its use value, which is logically impossible. For a detailed description of the problem, see in Slovak version. Pošvanc, M.: Critique of the regression theorem. Gold and silver as optimal and non-rigid money. WWW DOCUMENT <http://viagold.sk/kritika-regresneho-teoremu-zlato-a-striebro-ako-optimalne-a-nerigidne-peniaze-finalna-a-kompaktnejsia-verzia-clanku/> English version of the argument is available in Pošvanc, M: Why We needn’t (inevitable) Gold but Free Banking System.
 Selgin, G. White, L. (1996): In defence of Fiduciary media – or, We are Not Devo(lutionists), We are Misesians. WWW DOCUMENT <https://mises.org/library/defense-fiduciary-media%E2%80%94or-we-are-not-devolutionists-we-are-misesians> pages 100-101
 Hoppe, H. with Hülsmann, J.G. Block, W.: Against Fiduciary Media. WWW DOCUMENT https://mises.org/library/against-fiduciary-media-0, page 43
 Ibid. page 46
 See Guning, J.P. Interest: In defence of Mises. WWW DOCUMENT <https://mises.org/system/tdf/qjae8_3_5.pdf?file=1&type=document> or Latham, K. Dr. Hülsmann and the Pure Time Preference Theory of Interest. WWW DOCUMENT <http://csinvesting.org/wp-content/uploads/2015/04/latham_interesttheory.pdf >
 See in more detail in Pošvanc, M. Theory of the Interest Rate. WWW DOCUMENT <http://viagold.sk/teoria-urokovej-miery-aktualizacia/>
 Mises. L.: Human Action. „Originary interest is not a price determined on the market by the interplay of the demand for and the supply of capital or capital goods. Its height does not depend on the extent of this demand and supply. It is rather the rate of originary interest that determines both the demand for and the supply of capital and capital goods. It determines how much of the available supply of goods is to be devoted to consumption in the immediate future and how much to provision for remoter periods of the future.“ Cursive added. Pages 527-528. WWW DOCUMENT <https://mises.org/library/human-action-0/html/pp/806>.
 Rothbard. M Man, Economy and State (chapter Progressing Economy and the Pure Rate of Interest) writes: „We are not concluding, therefore, that an increase in the quantity or value of capital goods lowers the pure rate of interest because interest is the „price of capital“ (or for any other reason). On the contrary, we are asserting precisely the reverse: namely, that a lower pure rate of interest increase the quantity and value of capital goods available.“ (cursive original).
 Hoppe. H.H. The Misesian Case against Keynes.: „According to Keynes, since money has a systematic impact on employment, income, and interest, then interest itself — quite consistently, for that matter — must be conceived of as a purely monetary phenomenon (Keynes 1936: 173). I need not explain the elementary fallacy of this view. Suffice it to say here again that money would disappear in equilibrium, but interest would not, which suggests that interest must be considered a real, not a monetary, phenomenon. Section II.3. WWW DOCUMENT < https://mises.org/library/misesian-case-against-keynes#ii3>
 See for example in Pošvanc, M.: Theory of the Interest Rate, Theory of the Intersubjectively Perceived Value of Money, Critique of the Regression Theorem, Why Did Gold Become Money and Water Did Not. WWW DOCUMENT <www.viagold.sk>.
 The reader may notice a certain resemblance to quotation number 14, where H.H.B. write about an uncertain future, which they solve through money. Here, we solve it through a portfolio of goods to which the interest rate is related.
 My attention was brought to this given characteristic by my friend, an ally in the fight for freedom, and a co-organizer of PROTI-PROTI protest (Against-Against protest) František Chroustal. Chroustal, F. Personal conversation. Bratislava 16/10/2017.
 Value variance of goods caused by the time is the problem faced by misesian explanation of the interest rate based on time preference.
 In principle, the client demonstrates that he does not want his money to be used for facilitating an additional unit of exchange and delays said unit of exchange indefinitely in the context of unknown future needs if he withdraws gold from the system. If he moves his money to a different bank, he demonstrates that he does not want an additional unit of exchange to be facilitated under the conditions set by the first bank, and prefers another set of conditions created by a competing bank.
 This process is described in more detail in Pošvanc. M. (2018): Why gold became money, and water did not.
What kind of evolution can we expect to emerge from crypto-technologies? WWW DOCUMENT <http://viagold.sk/preco-sa-stalo-peniazmi-zlato-nie-voda-aky-druh-evolucie-nas-caka-kvoli-krypto-technologiam/>. This is also not about the mining companies reacting to the interest rate, but to other type of related economic signals.
 In the context of lowering the interest rate, reservists use the cartel argument, i.e. all banks are mutually incentivised to artificially lower the interest rate. As we have shown, however, in a free system, this incentive faces three counter-forces, where at least the first two that we mentioned are not related to cartelisation of the industry.
 This is Selgin’s argument in the context of an incorrect regulation of the American banking sector compared to the Canadian banking sector.
 Selgin. G: Theory of Free Banking. page 22. WWW DOCUMENT <http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf>. Selgin quotes Wicksel here. See page 22.
 Selgin, G. Should We Let Banks Create Money? WWW DOCUMENT <http://www.independent.org/pdf/tir/tir_05_1_selgin.pdf>, page 98.
 Compare with Hülsmann, J.G. Free Banking and the Free Bankers. WWW DOCUMENT <https://mises.org/library/free-banking-and-free-bankers> pages 13-14.
 It is curious but gold is an asset per se, which circulates in the fractional banking sector. Other assets that the bank holds on its balance sheets usually have a form of some kind of debt, bond, or equity only representing an asset and at the same time, whose appraising is dependent on the current situation in the market.
 It has to be stressed that currency is also obligation or debt with zero maturity; it is obligation for the immediate good/service delivery. We simply put it under the IOUs in this article where also some “real” debts with longer maturity than zero belong.
 See also my argumentation about an option of voluntary acceptance of a certain rate of socialization of losses in the banking system through the creation of fake IOUs by the bank, in case the banking system e.g. decreases the spread of credit exchange in the form of less strict conditions of repayment enforcement. I argue that clients of the banking system can voluntarily decide to accept socialization of losses through inflation (emission of fake IOUs by banks) in case that e.g. a comparable system requires some very strict conditions in case of not servicing the debt in the form of e.g. a family member as collateral or other such bestial practices. It is also an argument against Hoppe, H.H. (1994): How is Fiat Money Possible? See in Pošvanc. M. (2018): Why gold became money, and water did not. What kind of evolution can we expect to emerge from crypto-technologies? WWW DOCUMENT <http://viagold.sk/preco-sa-stalo-peniazmi-zlato-nie-voda-aky-druh-evolucie-nas-caka-kvoli-krypto-technologiam/>.
 Compare for example with Davidson. L. The Economic Consequences of Loan Maturity Mismatching in the Unhampered Economy. WWW DOCUMENT < https://mises.org/library/economic-consequences-loan-maturity-mismatching-unhampered-economy>. On an individual level, an identical process is realized where elimination of debt of one subject to another subject does not necessarily have to occur at the monetary level, but it can also occur in the context of charging payables and receivables, transferring payables and receivables and their trading, or it is also possible to think about barter compensation (price-wise derived from the monetary price) and also attributing a value agio (or discount) based on economic results of projects in time.
 Here, we apply the Hayek-Pavlík methodological evolutionary monism, that can be briefly described as follows. Spontaneous activities of people in a community contain certain sediments of knowledge that, through language, create a certain concreteness in the human mind. This always hits its applicational boundaries, which are overcome by the human mind in the context of better, higher quality, and more accurate view of the problem. It is as if the human mind overcomes said boundary spontaneously, while it creates a new qualitative combination of sediments of concrete knowledge. The overcoming of a boundary, however, in the form of new related activities, creates again a new concreteness, which will again hit a new boundary, that again needs to be overcome. We tried to provide the same description for the banking system as an “over-layer” over the basic layer of money; and money are over-layer over the basic economic activity in time. See in Pavlík, J.: Austrian Economics and the Problems of Apriorism. [WWW DOCUMENT] <http://nb.vse.cz/kfil/elogos/science/pavl106.pdf>.
What kind of evolution can we expect to emerge from crypto-technologies? WWW DOCUMENT <http://viagold.sk/preco-sa-stalo-peniazmi-zlato-nie-voda-aky-druh-evolucie-nas-caka-kvoli-krypto-technologiam/>.