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Is Fractional-Reserve Banking Fraudulent?

by Nelson Hultberg

"Where you and Professor Fekete are making your mistake is that you are condoning fraud with your toleration of fractional-reserve banking in the discounting of real bills. It is incumbent on government to prohibit such a practice. The law must make sure that in the case of time deposits, bankers be required to loan no more than the amount of the deposit. And the law must stipulate that demand deposits can never be loaned at all since they are payable to the owner on demand." So wrote a reader in response to my recent article, The Money Fallacies of Rothbard. This reader is defending the advocacy of 100% gold reserve banking. And he is prepared to enforce by law its requirements. Under such a system, no banker would be able to issue credit in excess of the gold coins that have been given to him under a time contract, and no banker would be able to loan or invest demand deposits of gold coins at all. Any violation of these requisites is to be termed fraud, and any banker partaking in such is to be prosecuted. This is basically what the Rothbardian camp will have to endorse if they are to implement their goal of a 100% gold monetary system.

How Do We Define Banking Fraud? The important questions that we must ask here are: Would such a legal approach be logical and practical? Would it be true to freedom and justice? And most crucial of all, is it fraud for bankers to loan in excess of their gold reserves? Let's investigate further and see if we can come up with some definitive answers. The determination of what is "fraud" in the policies of banking revolve around how we are to define the money that a depositor gives to a bank. For several centuries now, it has been defined by the courts in Europe and America as a loan to the bank. The banker is thus entitled to invest those funds in various profit-making ventures. In this sense, all banking can be considered to be "investment banking." We as depositors operate fully aware of this. We realize that the banker is going to invest our money in any number of possible vehicles -- real estate loans, auto loans, venture capital loans, treasury bonds, muni-bonds, real bills, etc. We know that banks are in business to make money, and that they are going to put our deposits to work in pursuit of profits. In other words, we know ahead of time that this is going to take place. We also know that we don't have to deposit our money in such a bank under these conditions. But we do so because it is more preferable than keeping our money under the mattress, or in a safe deposit box. Murray Rothbard challenges this practice and says that it should be declared by the courts as fraudulent. He maintains that the depositor's money should be declared to be what is termed in legal jargon, a "bailment." This means that the deposit should be declared to be equivalent to a warehoused item. The banker cannot loan it out; he must keep it on hand for whenever the depositor wishes to demand it back. In other words, the depositor is not loaning his money to the banker; he is putting it there for safekeeping to be retrieved whenever he wishes. [See The Case Against the Fed, Mises Institute, 1994, pp. 40-45.] The banker, under the Rothbardian "bailment" system, would be able to only loan out or invest clearly stipulated time deposits of gold and gold notes, i.e., CDs. All demand deposits of such, i.e., checking accounts, would have to be warehoused. No percentage of them could be loaned out or invested by the banker, whether in real estate, bonds, or real bills. Period. Thus the term 100% banking. All deposited money (whether in gold or gold notes) must be warehoused unless it is stipulated as a time deposit. And any credit issued by a banker on time deposits of gold cannot exceed the amount of the time deposits. This certainly is one way to structure the banking system. It would be super safe that is for sure. But would it be practical, and would it be free and just under the principles of a freemarket society? Unfortunately the real issue is being overlooked by almost everyone: Are we to mandate by law that all banking be of this nature? Or should we simply leave the market FREE to decide on its own what kind of banking structure people would prefer to utilize? For example, in a genuinely free-market there would be nothing to stop entrepreneurs from forming Rothbardian "warehouse banks" by opening up for business to try and attract customers. And no doubt, they would gain a certain portion of the depositing public. They would have to charge their customers for this service, but I'm sure there are a certain amount of people who would be willing to pay for such a warehouse form of banking. However, I doubt their number would be sizeable. Far and away, most depositors would prefer to deposit their money in the more conventional "fractional-reserve banks" because these types of banks would offer higher interest for their time deposits, and they would not charge for their

demand deposits. In fact in a true free-market, many such banks would probably pay interest on demand deposits also. Some do right now under our present form of banking. Government or Market -- Which Is Best? Here is the paramount issue involved -- to which Rothbardians remain steadfastly impervious. What they are advocating will require that government mandate what type of banking the people should be allowed to partake in, rather than letting the marketplace decide. Government will have to legally stipulate that no one be allowed to operate a "fractional-reserve" bank, that all banks must in fact be "warehouse" banks. This is why I have stated in past articles that Rothbardians will have to become government interventionists in order to implement their 100% gold monetary system. They must interject government into the free interaction of entrepreneurs and customers to dictate what form of trade they may partake in. If men and women are simply left alone to make up their own mind (i.e., if we allow the marketplace to decide), then both fractional-reserve and warehouse forms of banking would spring up. My guess is that the overwhelming majority of people would choose to bank with the former rather than the latter. But which one they choose is not the issue. The issue is who is to make the choice between these two forms of banking -- the government or the people? Are we to have the choice dictated to us by politicians and their armed police, or are we going to be allowed to freely decide for ourselves in the marketplace? Because they declare fractional-reserve banking to be fraud, Rothbardians must opt for state dictates and armed police to decide. If they truly believe such banking practices to be fraudulent, they must bring in the law. This is the law's job, to prohibit "fraud." The question of allowing fractional-reserve banking thus cannot be left up to the free choice of the marketplace. It must be mandated by government. But this is a very sticky issue, this thing the Rothbardians are calling fraud. Are they defining it correctly? I don't think so. Fraud's first requisite is what we call "intent." The defrauder has to be "intending" to deceive and rob the other party of his property. He has to be engaged surreptitiously in acts of thievery. He has to be purposely trying to steal values from someone by not fully disclosing relevant details. Is this what would take place in a free-market banking system? In other words, would it be fraud for bankers to partake in fractional-reserve lending under the requirement to redeem all notes in gold upon demand and openly disclose their policies and their portfolios? I think not. It is fraud for banks to be able to suspend specie payment and still operate, and it is fraud for banks to hide their portfolios from the public. But if these privileges and policies are disallowed, then what bankers and their depositors do between themselves in free trade is their business. If the bankers wish to hold only 50% gold coin reserves behind their purchase of merchants' real bills because they know from hundreds of years of experience that such a reserve is more than sufficient to handle redemption requests, it is not fraud. They are openly divulging this aspect of their portfolio to the public, and they are not intending to steal anything from anybody. To some this might be risky and irresponsible, but to suppress this by use of government law is to violate the rights to free trade of the bankers and depositors. The Rothbardian detractors of fractional-reserve banking have constructed a theory of malfeasance to serve their ideological agenda! In so doing, they are leaving out the concept

of "intent." And they are ignoring the fact that under a free-market system of banking the policies and portfolios of all bankers would be fully disclosed. Therefore the practice of fractional-reserve banking in a free-market system would not be fraudulent. The reason why is because all banks would be required to redeem all gold notes in specie (and if they didn't, they could be held liable under law for their failure). In addition, they would have to fully disclose the content of their portfolios, which would be brought about through the "competition for reputation" that would naturally develop in a monetary system devoid of government control. See my article, Real Bills vs. Rothbard's 100% Gold System for a detailed discussion of why and how this would work. So the key is to divorce banking totally from the government control and intervention that is corrupting it, and it would police itself as far as quality and liquidity are concerned through natural market forces. Perhaps it could even be mandated legally that banks fully disclose every quarter, but that is a question that legal scholars such as Edwin Vieira would have to answer. Further Disclosure -- Boon or Bane? Rothbardians, no doubt, would insist on further, more explicit forms of "disclosure" on the part of banks, such as mandating a written warning to be issued to all potential depositors stating that they are engaging in business with a fractional-reserve bank, and that they as depositors are not to assume their funds are held 100% in the vault. If such a warning were to be legally required, I doubt that such a disclosure would deter many would-be depositors. In a free-market system, the primary determinant as to where one deposits his or her funds will always be that bank's reputation built up over the years. Fractional-reserve banking is perfectly capable of being operated safely if done in a system with gold convertibility backing it that is devoid of central government control. The reason why such a system became abused in the past is because banks were granted special privileges by government regarding their portfolios and the necessity for specie redemption. Eliminate the privileges and protections from government, and fractional-reserve banking ceases to be dangerous. Under such a benign form of fractional-reserve banking, the responsible practitioners would gain the lion's share of customers via the reputation they have built up over the years. Requiring them to announce in writing to all potential depositors that their funds will be loaned out and invested for profit rather than stored in the vault would be rather gratuitous; it would be to announce what everyone already knows. To be consistent, the Rothbardians would then have to also require that all airlines announce, ahead of time in writing, to all their passengers that they are embarking upon a journey in an aircraft that could crash and kill them? Rather gratuitous, I would say. It's something that everyone knows and basically lives with. No one has to get on the plane; they could choose to drive, or take a train to their destination. They could choose safer forms of travel if they desired. Here is where we meet the slippery slope of state interventionism! Our politicians and bureaucrats, operating under a Rothbardian mandate to warn bank depositors and airline travelers of the dangers of their endeavor, would certainly not stop there. They would, of course, extend their "protective bureaucratism" to every nook and cranny of our lives. Is this not what they are doing presently in modern society? Thus if Rothbardians wish to legally mandate that depositors be warned about engaging in fractional-reserve banking, they are

going to have to abandon their free-market philosophy and don the hat of Nanny State bureaucratism. There is no logical cut-off point where they can successfully contain their "banking mandates" from spilling over into all other human endeavors. What are we to conclude from all this? Fractional-reserve banking, properly conceived and implemented, is not fraudulent. To try and prohibit it will require an unjust violation of the rights of free men. To try and discourage it with government propaganda warnings will merely unleash the monster state to permeate the rest of our economy. Depositors basically live with the fact that bankers are investing their deposits, rather than storing them in their vaults. If Rothbardians will just allow the marketplace (that they so rightly champion) to freely and fully operate, then all depositors would be able to choose a warehouse form of banking if they desired its higher level of safety over the fractional-reserve form. And they would also be able to choose the opposite if they so desired. Would this not be far more in keeping with the ideals of freedom? Would this not be the more just way to organize our banking system? The answer should be obvious. Those who have bought into the Rothbardian agenda of a 100% gold system are grievously wrong about what proper banking is and is not. Their prescriptions will never build a sane and prosperous economy, much less a free one. Our answer to this monumental monetary question is to restore a true free-market society in America that gives all men and women the right to make their own choices as to which form of banking they prefer.

Real Bills vs. Rothbard's 100% Gold System by Nelson Hultberg

In two recent articles, Fool's Gold and Real Bills, Phony Wealth, Sean Corrigan and Robert Blumen of the Mises Institute have put forth attempted rebuttals to Antal Fekete's work on the Real Bills Doctrine as a necessary accompaniment to a gold monetary system. They offer numerous economic arguments as to why real bills are supposedly dangerous instruments that will ignite inflation, and why Murray Rothbard's 100% gold standard is the only answer. There are four basic flaws in their analyses that I will cover in this essay. These are far from the only flaws, but I will leave a further and more theoretical examination to Dr. Fekete himself. The Definitional Flaw The first mistake made by Corrigan and Blumen is their Rothbardian conception of what inflation is. They rigidly define inflation as any excess of money and credit over gold and silver reserves. They believe that all such monetary inflation is dangerous because it will always bring about price inflation. This, of course, is not true as all credible economists understand, among them the famous libertarian Henry Hazlitt. I pointed this out in my previous article, Real Bills, Gold and the Big Picture. If we are to find the truth in this debate, then we need to start with a proper definition of inflation. Meaningful inflation is as Henry Hazlitt described it, "an increase in the supply of money that outruns the increase in the supply of goods." [What You Should Know About Inflation, pp.139-140.] This explanation is starkly different from Murray Rothbard's definition as: "any increase in the economy's supply of money not consisting of an increase in the stock of the money-metal." [What Has Government Done to Our Money?, p.23.] The reason for the superiority of the Hazlitt definition is that it concerns what brings about PRICE inflation, which is the only form of inflation that matters. If the supply of goods produced from a monetary inflation keeps pace with the increase in the supply of money, then there will be no PRICE inflation. Thus increasing money and credit in excess of gold and silver reserves will not automatically bring about price inflation. It depends on the "increase in the supply of goods" that results. Consequently Rothbard's definition of inflation is flawed. Since both Corrigan and Blumen subscribe to the rigid Rothbardian definition of inflation, they naturally see the phenomenon of real bills as dangerous because real bills expand the money supply in excess of gold and silver reserves. But legitimate economists are never concerned solely with monetary inflation. They are always concerned with whether such monetary inflation will bring about price inflation. If it does, then it is dangerous. If it does not, then it is benign. Why did Rothbard subscribe to such a rigid definition of inflation? Because he had an agenda! He wanted to establish his thesis that a pure 100% gold system was necessary and that a modern economy could function on such a system. To do this, he had to maintain that

all monetary expansion in excess of gold and silver reserves will bring about the dangers of price inflation. To accept Hazlitt's definition would allow for monetary flexibility as long as the growth of goods kept pace. This would discredit Rothbard's agenda. Consequently the role that the supply of goods plays in inflation had to be ignored. He had to hammer home relentlessly that "any increase of money or credit in excess of gold and silver reserves" is always dangerous. Because Rothbard started with the desire of proving the necessity of a pure 100% gold monetary system, he thus had to maintain a rigid, implausible definition of inflation so as to lend support to the "necessity." He had to ignore logic and the wisdom of all credible economists in the field, which state that if the growth of goods and services matches the growth in money, there will be no price inflation. Such is the folly of those who start out with a preconceived agenda, and then try to bend the facts of reality to that agenda, rather than just letting the facts take them where they will as wise scientists are supposed to do. Will Real Bills Be Inflated by Bankers? The second error made by Corrigan and Blumen in their attack on Smith's Real Bills Doctrine is they ignore the fact that real bills are only meant to work in a truly free-market banking system. Real bills (and any other form of credit / clearing) are going to be abused in a government run system. That's a given. In order for real bills to really be safely utilized requires the absence of any central bank as a lender of last resort. Because they ignore this fact, Corrigan and Blumen have developed a highly flawed argument against real bills. They are hung up, not on the essence of real bills themselves and the necessity of their clearing function, but on how the central banks might abuse the real bills by using them as the basis for the issue of new money and credit. True, central banks will abuse them if the CB's are in existence. But in an independent banking system, they won't be there to abuse the use of real bills. The Corrigan gang conveniently refrains from discussing this. If the government does its job correctly (i.e., if it punishes fraud and does not protect the banks with privilege), there is no reason why real bills would bring about price inflation because they are always matched by Hazlitt's "supply of goods." As an example of this irrational hang-up on their part, Corrigan writes in his article, Fool's Gold, that "one of the most insidious dangers of the RBD is precisely that it allows such 'clearing instruments' to be converted into -- indeed, to form the basis of the issue of -- money and thus it begins to disrupt all-important relative price signals." Blumen also expresses a similar fear that when banks discount the bills for cash to their holders, they will not park the bills in their vaults for the 90 days until expiration. They will turn around and collateralize more credit with them, i.e., create demand deposits with them as reserves. Obviously i f this is done, then it would indeed be inflationary, for NEW money would be coming out of thin air into the economy that is not backed by corresponding goods. But what Corrigan and Blumen are forgetting is that this would not take place in a free-market system of independent banks. Why? In a truly free-market banking system, commercial banks would not be able to use the real bills to expand credit for two reasons: full disclosure and the competition for

reputation. Sure, there would probably be a few banks that would succumb to using the real bills in their portfolio to collateralize new credit for their customers, rather than just keep them in the vault and be satisfied with the discount as their profit. But they would be very few, and they would not stay in business very long. For example, without a government central bank to back up the commercial banks, all banks would be independent and on their own. This would force them to remain very liquid in order to avoid runs and bankruptcy. This would be their number one concern -- remaining liquid. Thus they would have to attract their customers with solid banking practices, rather than the inflationary practices of a central government backed system. This necessity to avoid bank runs and bankruptcy would force banks to keep their real bills in the vault rather than expand credit with them. And full disclosure every quarter is what would make them do this because the biggest concern a depositor would have in an independent banking system is the bank's integrity and liquidity. This would be THE PARAMOUNT ISSUE with all potential depositors! The first thing they are going to want to know about a bank before they leave their life savings with that bank is how solid, how liquid is it. How susceptible to bankruptcy is it? So very few banks would dare to collateralize demand deposit loans with their portfolio of real bills in the face of quarterly full disclosure to the public. To do so would diminish their depositor base. And all banks would have to comply with quarterly full disclosure to the public, or they wouldn't be able to attract any depositors at all. Who would dare to deposit their money in a bank that does not disclose quarterly? No one. It would be tantamount to disaster for a bank not to fully disclose. Under our system of government regulated banks today, no one is concerned with a bank's portfolio and its liquidity because they know that the Fed will always be there to back up that particular bank if it gets into trouble. But in a free-market system of banking (where all banks are independent and on their own), then all depositors will very quickly become extremely concerned with the bank's integrity, its liquidity, its reputation. No one is going to put money into a bank that is top heavy with outstanding loans in excess of gold reserves. In a free-market system of banks, there would actually spring up private watch dog reports (somewhat like our present day Consumer Digest) that would give out quarterly ratings of all banks on a nation, state, and city-wide basis -- rating the quality of their policies and their portfolios. To be rated high on these listings would be of extreme importance to every bank. Thus, there would be very few banks that loan on their real bills, and these banks would not stay in business very long. The principle governing this is what is called "competition for reputation." It is the guiding regulatory mechanism of a FREE market. All banks would be compelled to build a sterling reputation and maintain it over time in order to attract and hold on to customers. This is the only way that they could have customers period. They would have to have a reputation built up over time as a bank that is always liquid and NEVER in any danger of bankruptcy. Full disclosure and the competition for reputation are the keys. In a free-market system of banks (devoid of a central bank), there would be no other way for a bank to survive, much less prosper, than to stay very liquid.

Here then are rock-solid protective keys for the validity of real bills and how they would actually work in a free-market banking world. Full disclosure and the competition for reputation will very nicely insure that real bills stay in the vaults and do not end up as collateral for new credit. Alan Greenspan wrote a very instructive piece on the "competition for reputation" in Rand's Capitalism: The Unknown Ideal (Chapter 9, "The Assault on Integrity") back in the sixties. This was when he was still a free-enterpriser instead of a government functionary. In that piece, he wrote: "What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product. Since the market value of a going business is measured by its money-making potential, reputation or 'good will' is as much an asset as its physical plant and equipment. For many a drug company, the value of its reputation, as reflected in the salability of its brand name, is often its major asset. The loss of reputation through the sale of a shoddy or dangerous product would sharply reduce the market value of the drug company, though its physical resources would remain intact. The market value of a brokerage firm is even more closely tied to its good-will assets. Securities worth hundreds of millions of dollars are traded every day over the telephone. The slightest doubt as to the trustworthiness of a broker's word or commitment would put him out of business overnight." And so it would be with all bankers. They would have to acquire a reputation for top quality service and money management. The slightest doubt among the depositing public as to a bank's trustworthiness and liquidity would put that bank out of business. Thus banks, more than any other business in the marketplace, would be very dependent upon maintaining a sterling reputation. The principle of "competition for reputation" is thus our insurance guaranteeing that banks will not rush to issue new credit and corresponding demand deposits with the real bills as collateral, and in the process create a wave of price inflation. They will refrain from doing so because such integrity will be the only way they can attract customers. Why have the Rothbardians forgotten this elemental principle of the free-market? Because it clashes with their agenda! They want to establish the thesis that a pure 100% gold monetary system is what is necessary in a free society, and that a modern economy can function fine on such a system. Therefore to dwell on the "competition for reputation" in a free-market in relation to banks would bring to light the discomforting fact that bankers would be compelled to NOT use real bills in an inflationary way. This realization would prohibit Rothbardians from claiming how bankers are sure to use them as tools for credit expansion, and such a prohibition would subvert their primary agenda of promoting a 100% gold system. Here we have an example of the truism that once an agenda rules the mind to the exclusion of the facts of reality, one is on a slippery slope to unreality. Interest Rate vs. Discount Rate The third flaw in the Corrigan gang's attack on the Real Bills Doctrine lies in its unscholarly tactics. For instance in his recent article, Fool's Gold, Corrigan ridicules Fekete's claim that the interest rate and the discount rate are separate in their origin.

He writes that, "One may acquire a hint of the sheer perversity of the clique's argument when one knows that among the many enormities Prof. Fekete propounds is one in which he contends that the rate of interest is to be treated separately from the rate of discount." But then he says no more on this vital issue. Does he assume that by declaring Fekete's contention to be "sheer perversity" and one of "many enormities" it is somehow a prescient and rational commentary? Is this his idea of a valid refutation? This separation of the interest rate and the discount rate is a paramount issue. It cannot be contested with a smattering of smear words. One of Antal Fekete's major points is that as we were moving out of the Middle Ages and through the Renaissance, credit evolved in two distinct forms: (1) conventional credit to be financed out of savings, and (2) short-term, clearing credit to be financed through spontaneous bills of exchange between producers, distributors and retailers. These two distinct forms of credit must be recognized for their reality in human economic affairs. The conventional form is governed by the interest rate and man's propensity to save, while the clearing form is governed by the discount rate and man's propensity to consume. Conventional credit finances fixed capital and must come out of savings. It is used for funding major construction projects such as factories, offices, apartments, shopping centers, housing tracts, and also to purchase plant equipment and technology, mortgage homes, buy large ticket, slow-moving goods, etc. But short-term, clearing credit arose during the Renaissance to finance consumer goods, and it does not need to be drawn from savings. It is used for fast moving goods (food, clothing, fuel, accessories, etc.) and also for the payment of wages to workers. Thus during our evolution from the Middle Ages to the Renaissance, there sprang spontaneously from the free-market clearing instruments called "bills of exchange," or what we call today, real bills. Because these bills did not need to be drawn from savings, it freed up society's savings to finance a far more prodigious level of factories, technology and productive infrastructure, which led to a far higher standard of living for everyone. Fekete maintains that it is a major theoretical error to lump all forms of finance into one descriptive category called credit. There are two very different forms of credit, which a proper study of monetary history throughout our evolution from the Middle Ages to the Renaissance will reveal to us. These two forms are as indicated above: conventional credit (i.e., bank loans that must be taken out of human savings so as not to bring on price inflation), and short-term, clearing credit (i.e., real bills written between market participants that do not need to be drawn from savings in order to avoid price inflation because they are backed by corresponding consumer goods that are urgently needed and moving along the production chain to be purchased with gold coins within 90 days). Therefore the interest rate and the discount rate are two separate things governed by the two different human inclinations to save and consume. Fekete maintains that Ludwig von Mises errored in his failure to make this distinction. This led Mises and his student Rothbard, along with their followers, to think of all credit as monolithic in nature that needed to be drawn solely from savings. Thus their antagonism

toward any form of credit that exceeds gold and silver reserves. This has created their vehement denunciation of real bills as clearing instruments for consumer goods. Professor Fekete has written a most illuminating series of works, Monetary Economics 101 and 102, on how real bills came into being, how they function as clearing instruments, why they are not inflationary, and why they are governed by the propensity to consume, which is not to be lumped in with the propensity to save. To declare this theoretical position to be "sheer perversity" and one of "many enormities," and then consider it to be satisfactorily refuted, is to employ ad hominem as a substitute for reason, research and scholarship. Mr. Corrigan is going to have to offer something a bit more appropriate if he wishes to divine the truth in this matter. A good start toward grasping the truth of real bills would be to actually peruse the scholarship of Dr. Fekete's two major works mentioned above. In these works, Fekete shows that: "[T]here is no lending and borrowing involved in discounting a real bill, and that bills stand apart conceptually as well as functionally from bonds, as does the discount rate from the rate of interest. Real bills circulate on their own wings and under their own steam. To put it more succinctly, the negotiation of the bill is not a lending but a clearing function. One of the greatest shortcomings of Mises' theory of interest is his failure to recognize the discount rate as another independent and autonomous regulator of credit. It is a mistake to believe that saving is the only source of credit. Clearing is a well-recognized second source. The rate of interest is the regulator of lending, grounded in the propensity to save. The discount rate is the regulator of clearing, grounded in the propensity to consume. The relationship in both cases is inverse: the higher the propensity the lower is the rate, and conversely. For example, the higher the propensity to save, the lower is the rate of interest; the lower the propensity to consume, the higher is the discount rate." [Monetary Economics 101, Lecture 4, "The Two Sources of Credit."] Why then do Corrigan and his cohorts so vehemently protest Fekete's quite reasonable contention that the interest rate is of different origin from the discount rate? Because of their agenda! They have bought into Rothbard's claim of a pure 100% gold monetary system as mandatory in order to avoid price inflation. Thus they must deny any claim that the interest rate and discount rate are separate in origin. If they don't, they then have to confront the fact that credit is not monolithic to be drawn solely from savings. Credit can then possibly exceed savings (i.e., gold and silver reserves) without causing price inflation. Hazlitt's concept of inflation then is more valid. All these conclusions threaten the promotion of their agenda. This, I contend, is the reason for the ad hominem barbs on the part of Corrigan in response to Fekete's declaration of the difference between the origins of the interest rate and discount rate. Fekete's declaration has to be ridiculed to the Rothbardian choir by any means possible lest a very real danger to the credibility of Rothbard's agenda be unleashed for astute minds to ponder. The Final Most Crucial Flaw The most important mistake being made by Corrigan and the Rothbardians is that they continue to ignore the fact that in a free-market system, real bills will automatically spring up and be used wherever they are functional. There is nothing to stop them! They are not fraudulent; and they are not governmentally orchestrated. So they will certainly be utilized

among producers, distributors and retailers if we are going to promote freedom. And I presume that is what the Rothbardians wish to promote. What are Corrigan and his cohorts going to do? Suppress the use of real bills with government intervention? Not very libertarian at all. If Rothbardians wish to prohibit the issuance of real bills by producers, distributors and retailers, and their subsequent discounting by banks, then they will have to circumvent the very FREE market they profess to espouse. Why are Corrigan and Blumen, et al ignoring this vital point? Because their agenda consumes them! Corrigan writes in his final paragraph of "Fool's Gold" about the necessary "protections which would be afforded by the institution of a free banking system, securely bound by the ordinary laws of contract and girded tightly about with a 100% gold coin reserve standard." [Emphasis added.] But the mother of all ironies is that in a free banking system, a pure 100% gold system would never come about. The market (if left free) would reject it because it is not as conducive to high capital accumulation and productivity as a gold coin system accompanied by real bills would be. It would be rejected just as the free traders of the Renaissance rejected the 100% gold system of the Middle Ages. For further corroboration of this, see Real Bills, Gold and the Big Picture. Corrigan, Blumen and all Rothbardians have, therefore, ensnared themselves in a monumental contradiction with their antagonism toward the use of real bills -- which is that they are fighting against a form of money that springs from traders freely interacting. Real bills are an example of the marketplace determining (in a non-fraudulent, non-privileged manner) what money is to be rather than government interventionists doing the determining. If Corrigan, Blumen, et al wish to prohibit the employment of real bills, then they are going to have to become government interventionists. So I believe it is the Corrigan gang who has, in fact, been hoisted on its own petard here. Fekete's position is clearly that the market should determine what money is to be, and that when it is allowed to do so in the absence of fraud and special privilege, it will choose gold and silver accompanied by real bills. It did precisely this for several hundred years prior to the institution of central banking in England during the 19th century and America during the 20th century. The fact that our monetary systems were not truly free-market systems during the 19th century is the reason why credit became abused. Real bills were not the culprit. To try and indict the Real Bills Doctrine as perhaps the "single greatest danger" to monetary integrity (as Corrigan claims) is to put oneself in the position of having to prohibit the free monetary choice of the market itself. This gives great ammunition to the Keynesians and statists of all stripes. Corrigan's logic leads one to assume that freedom itself must be considered a "great danger" to monetary integrity? The statist mentalities are going to love rebutting such a defense of gold and freedom. Our goal must be a free-market system of banking and whatever the traders choose to use as money as long as they do not use fraudulent and /or privileged methods to do so. Until the Corrigan gang comes to grips with their continual avoidance of this issue, then a rational

understanding of where the modern world needs to go monetarily will never be part of their agenda. Corrigan's ad hominem linkage of Professor Fekete with John Law and J.M. Keynes does not bring us closer to the truth. His recent smart-alecky attack is good "red meat rhetoric" for the apparatchiks that have gathered together into the Rothbardian 100% gold dollar cult, but it will not do for the more astute students of the great monetary issues of our age.

Nelson Hultberg Americans for a Free Republic Nelson Hultberg is a freelance writer in Dallas, Texas and the Executive Director of Americans for a Free Republic www .afr.org. His articles have appeared in such publications as The Dallas Morning News, Insight, The Freeman, Liberty, and The Social Critic, as well as numerous Internet sites. He is the author of Why We Must Abolish The Income Tax And The IRS (1997) and Breaking the Demopublican Monopoly(2004). He is presently finishing a book on political-economic philosophy entitled The Golden Mean: The Case for Libertarian Politics and Conservative Values. Copyright 2004-2008 Americans for a Free Republic Image rendition and html coding Copyright 2000-2009 SafeHaven.com