Fractional Reserve Banking IS fraud

Article by Colonel Nogov on Feb 17,2015

I was reading an article by a respected anarchist.  The point of the article was that FRB was not fraud.  FRB is one of those issues among anarchists that is in dispute whether it is or is not fraud.  If you don’t understand FRB please read my article here that explains what it is in layman’s terms.

Their article’s main point was informed consent.  This seems logical.  Fraud constitutes deception and theft of some sort.  Since the depositors were informed of the fractional reserve banking practices, there is no deception or theft of the depositor’s money for financial gains.  They are informed and give consent.  They are assuming the risk.  I don’t think I’ve misrepresented their argument.

It’s a reasonable argument, but I think it comes up short.  Here is why I believe it is fraud.

The contract for FRB is impossible on its face.  When a depositor puts money into a bank, such as a checking or savings account, the bank lends that money out.  It also allows the depositor to retrieve the funds on demand at any time.  In contractual form this is impossible.  The Bank cannot lend out the depositor’s money AND allow the depositor to retrieve his money on demand.  He can do one or the other.  He cannot do both simultaneously.  If the money is lent out, it is not available for retrieval.  If the money is retrievable on demand it cannot be lent out.

It is not possible to give consent to something that is impossible.  The depositor cannot give consent to a FRB contract.  This is like saying I give my consent to stop aging.  You are going to age no matter what, just by saying you consent to stop aging doesn’t stop the aging process.  It’s impossible.  Just by saying you consent doesn’t make it possible.

This is the first reason it’s fraud.  The contract itself is a lie.  Even if both parties believe the lie, it’s still a lie.  That’s the deception.

If FRB is impossible, how come it’s going on?  It happens because depositors aren’t exercising their rights to retrieve their money.  Contracts can have rights in them that someone doesn’t exercise.  For instance, say you bought a mattress and the contract said you had the right to return the mattress within 90 days for any reason for a refund.  If you like the mattress you don’t exercise that right and you keep the mattress.  If you don’t like the mattress, you could return it after one day, 10 day, 30 days, or whenever up to 90 days.

What would make the mattress contract impossible would be if you could both keep the mattress AND return it for a refund.  Obviously you can’t do both, you can do one or the other.  People aren’t exercising their right to retrieve their money from their demand deposits, but that doesn’t mean they won’t.  They could at any time.  According to the impossible FRB contract they have that right.  When they do exercise that right all at once, it results in a bank run.  This is when it’s realized the contract was impossible and fraud.  The money isn’t there because it’s been lent out so it’s not available to be retrieved.  Fraud usually isn’t discovered until there’s a problem.  Like a Ponzi scheme, it’s only when the scheme is collapsing that people realize the scheme was a fraud.

When a bank practices FRB, it is stealing from the general public.  It’s creating money out of thin air.  When it lends out depositor’s money, but also claims the depositor’s money is still available for withdrawal, it’s inflating the money supply through accounting trickery.  Inflation is theft.  It reduces the purchasing power of everyone else who uses the money and transfers that value to the one doing the inflating.

An example.  Imagine you’ve saved ten thousand dollars and you want to buy some stock in a company.  Another person goes to ABC bank and borrows eleven thousand dollars to buy the same stock.  With the borrowed money that was created out of thin air by the bank, person #2 is now an active bidder against you for the stock, driving up the price of the stock.  The amount of stock you could have bought with your ten thousand dollars has been reduced.  You lost purchasing power because of the funny money that bid against you.  The bank’s creation of money stole your purchasing power.  It’s fraud and not outright theft because the banker didn’t actually steal your money, he reduced its value through inflation and transferred the value to himself.  He will earn interest and/or fees for the money lent.  He’s reduced the value of your money and generated an income for himself.  Clever eh?

Fractional reserve banking is fraud.  There’s deception.  The impossible contract that can’t be consented to.  And, there’s theft.  The stealing of purchasing power of everyone who uses the money including, ironically enough, the depositors and transferring the value to the banker.

Stay tuned for the next installment when the government and a central bank get in on the racket.  See how fraud is legalized on a massive scale.