Rothbard vs. Mises on Free Banking

In a private Facebook message, Kurt Fiech directed my attention to an article by Gary North on the conflict between Rothbard and Mises regarding the enforceability of a 100% gold standard.

Rothbard vs. Mises on Fractional Reserve Banking

Thanks Kurt. I haven’t had time since the tornado to check out Gary North’s Website. I thought I might as well share my thoughts with others on this blog.

Here’s North’s description of banking in a free/Christian/anarchist society:

“The only way for the bank to pay a rate of interest is for the bank to lend the gold coins or receipts to gold coins to entrepreneurs or consumers, who in turn promise to pay back more than they borrowed at the end of a specified period of time. The debtor borrows the gold, which serves as money, to buy something. Therefore, the original depositor cannot get his gold coins back during the period of the loan.”

Note the last sentence.

Rothbard says banking originated as warehousing. Depositors did not expect to be paid to deposit their gold in a warehouse. They paid for storage. If they want to be paid, they must forfeit the right to immediate withdrawal. This is a matter of contract under a Free Market. The depositor cannot get his gold coins back because he knows they are going to be invested. (Or, in less Godly societies perhaps, “loaned out.”)

Now North’s next paragraph:

“The banker has made the promise to depositors only on this basis: he does not believe that all the depositors will come down to the bank on the same day and demand payment in gold. Therefore, the entire banking system rests on a statistical probability. This denies the statistical possibility of payment on demand in 100% of the cases. “

Depends entirely on the contracts. Depositors could be contractually obligated not to withdraw. The bank has no contractual obligation to honor a demand for immediate withdrawal.

“Let us say that all of the depositors decide they want to get their coins back on the same day. They line up in front of the bank. Once at the front of the line, each depositor insists that the bank pay him his coins. He stresses his coins. They are not the bank’s coins. The contract says so.”

Not necessarily. Rothbard distinguishes two kinds of banking: one is a storage of a specific item (“the 1849 Double Eagle in proof condition once owned by Treasury Secretary William Meredith”), the other a contract for fungible items (“1 oz. of gold”).

Now we get to prejudicial rhetoric.

¿ Is this a reasonable statement:

The Federal System is a system of states. But, because the federal government wants cooperation from the people, and also from the smaller states, and because ultimately self-government is the most important form of government, the federal government agrees to certain kinds of terms that will be acceptable to those under its jurisdiction. These people will accept certain rules as binding the courts, and the federal government agrees, because it wants to get cooperation at a lower price than it would cost if people resisted the decisions of the courts.

Wacko? Fringe? Nutcase?

Perfectly rational, hopefully peaceful, mainstream political science. Right?

But here is Gary’s original:

The warlord society is a system of gangs. But, because the warlord wants cooperation from the people, and also from the smaller gangs, and because ultimately self-government is the most important form of government, the warlord agrees to certain kinds of terms that will be acceptable to those under his jurisdiction. These people will accept certain rules as binding the courts, and the warlord agrees, because he wants to get cooperation at a lower price than it would cost him if people resisted the decisions of the courts.

Ooooohh, that sounds so scary, Gary.

But again, the only way the State is going to be abolished permanently is through regeneration, revival, repentance, reformation, etc. Swords into plowshares. Christian anarcho-pacifism. Patriarchy.

Then North says this:

“Under such a system, there can be settlements of disputes. The settlements are made on the basis of coercion. This is how they are made under a system of civil government. It was the position of Mises, as distinguished from Rothbard, that the state is a legitimate way to get issues settled with the least amount of violence and the greatest predictability. Under this system, Mises believed there would be greater predictability, lower costs of enforcing the decisions of judges, reduced violence between individuals, reduced violence between plans, and a social order favorable to the division of labor.”

I can’t find my copy of Rothbard’s For a New Libertyright now, but I’m comfortable with his outline of a Free Market system of dispute resolution. See also books like

• David Friedman, The Machinery of Freedom: Guide to a Radical Capitalism, La Salle: Open Court, 1989 (2nd ed.);
• Morris and Linda Tannehill, The Market for Liberty, New York: Laissez Faire Books, 1984;
• The Enforcement of Rights by Butler Shaffer

There is an interesting parallel between North’s praise of the State and that of Harvard Psychologist Steven Pinker:

Steven Pinker: Why Violence Is Vanishing – WSJ.com

I agree with Pinker on the decline of violence, but it is clearly correlated to the spread of Anarcho-Christendom: Service, forgiveness, repudiation of vengeance. When Christianity loses cultural sway, as it did 1860-1980, violence rises.

North:

“[Rothbard] had a theory of multiple police forces, which he discussed in chapter 12 of For a New Liberty. The problem here should be obvious: the police force with the most efficient system of warfare will turn itself into the state.”

This is never proven.
In a Christian society, it won’t happen as long as Christian ideals dominate culture.

But let’s assume it’s true and ask why.

Perhaps the reason is because the demand for a Free Market agency of coercion is itself non-Christian. Any coercion is unChristian. If your bank loses your money, your recourse is Matthew 18:15ff. Excommunication. Police = deacons.

Social boycott is pressure, but not “coercion.” Coercion is violence. Coercion is vengeance. Coercion is unChristian.

That’s the argument from ethics. There’s an argument from economics as well.

Americans demand a “government” (agency of coercion) to protect us against the statistically insignificant chance of a burglary or robbery or breach of contract, but the cost is a statistically inescapable 60% of our income per year.

The cost of centralized taxation is greater than the cost of decentralized “warlords,” which is greater than the cost of pacifism and forgiveness combined with self-government and Biblical education.

North:

“[Rothbard] appealed to common law judges, but he did not show how common law judges could enforce their rules without the backing of people with badges and guns.”

Perhaps they can’t. Victims lose. But without coercion society loses less than it does now, under a coercive system of “final appeal.”

I would rather suffer losses under anarchist “courts” (that is, losses which result from the absence of coercive government) and enjoy the “blessings of liberty” (which would be a much higher overall standard of living, with a doubling of discretionary income [if taxes take two-thirds, then repeal of taxes would be a tripling of income, with half of the bonus being required for social infrastructure at reduced Market prices]).

We all agree with North on the need for commodity money and the harms of fractional reserve banking:

“[Mises] argued that the misleading price signals that are produced by [fiat money], especially in the area of interest rates for loans, are what lead a majority of entrepreneurs to make the same investment mistakes simultaneously.”

The only way we’re going to have a stateless society is if we have a Christian/pacifist society. How many such Christians are going to go into debt to invest? Why would they need to do this if there are strong families and no inheritance tax? How many Godly Christians are going to loan gold to these bad investors who come from broken homes and are unwilling to work and save before they have funds to invest?

Usury and Rewarding the Wicked

Read more at Kevin Craig for Congress