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What Is Money? Part 3: Schizophrenic Economists

• Lew Rockwell (HT Liberty Pulse)

The most detailed study of this grant of legal privilege is Prof. J. H. DeSoto's 900-page masterpiece, Money, Bank Credit, and Economic Cycles. It is easy to read and comprehend; you just have to stick with it. He shows how this violation of contract law has led to inflation, the boom-bust business cycle, and depression. You can download the book for free.

Non-Austrian School free market economists do not challenge this legal arrangement, either in the name of economics (counterfeiting) or law (special privilege). They accept it. They do more than accept it. The applaud it, but in a value-free, totally neutral academic way. They are apologists for this grant of privilege.

They pay an intellectual price for their cheerleading. They cannot conceptually integrate this grant of privilege into their general theory of economic causation, which rests on a concept of private ownership and enforceable contracts. They make no attempt to square the analytical circle. They remain silent about this anomaly. They pretend that their various rival theories of economic causation are coherent. They aren't.


A decentralized free market enables an individual to decide what are the best options for the assets he possesses. This decentralized market transfers responsibility to the individual who owns the assets.

The assumption here is an individual is more careful about allocating the assets he owns than a distant bureaucrat is. This system is sometimes called "consumer sovereignty." I prefer to call it "customer's authority." The customer has money, which is the most marketable commodity. He therefore has economic authority – not legal authority – over the seller of a specialized good or service. The person who has money can spend it almost anywhere. The person who is trying to sell a specialized commodity faces a narrow, limited market. In order to preserve customer's authority, the legal structure should make individuals responsible for setting prices, not distant committees.

In such a private-planning system there is no monopoly. The government does not grant special privilege to anybody in the society. This includes bankers. The same rule of law that applies to the individual must also apply to bankers.

An individual is not allowed to pretend that he owns assets, writing contracts in terms of assets that he does not own. Neither should bankers allowed to do this. But under fractional reserve banking, bankers are allowed to lend money to individuals at a rate of interest. They get money to lend from depositors. Yet the depositors cannot come down the same time and take their money out of the bank. The funds are gone – lent out. The bank is borrowed short and lent long.

This is a violation of contract rights. This is defrauding the depositors. It places extra risk on the depositors, despite the fact that the bankers made a promise that there is no such risk. An individual is not allowed to do this, but a licensed bank is.


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