Money, Banking, and the Gambling-Stakes
Paradigm
for Loan Collateral and Labor Contracts
by Roy Halliday
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Outline
-introduction
Creating Money
Saving Money (Banking)
Loaning Money (Financing)
Paying Off Loans
Forcing People to Work
The Moral Autonomy
Argument
The Inalienability
Argument
The Fraud Argument
Gambling
Unsecured Loans, Secured
Loans, and Risks
Conclusions
notes
A free nation is a jurisdiction in which the laws support each citizen's right to decide what to do with his own life and property — because all the laws are based on the non-aggression principle. A free nation would have a free market economy in which the only legal restrictions on trade are: (1) trades must be voluntary (because theft is outlawed by the non-aggression principle) and (2) the people who are trading must be the rightful owners of the property being traded (because fraud is outlawed by the non-aggression principle). This means that before a legitimate trade can occur, the person offering to trade something must be its legitimate owner or he must have permission from the legitimate owner. That is, he must have the authority to trade the property and he must have acquired that authority in a way that is consistent with the non-aggression principle rather than through theft or fraud.
The economic laws that govern a free market consist of the logical implications of the non-aggression principle applied to voluntary exchanges of property titles. These natural laws, rather than legislation or government regulations, determine the short-term and long-term consequences of market transactions and the ownership at any given time of all economic resources and wealth including money, labor, capital, consumer goods, and services.
So in analyzing such things as money, banking, loaning, and interest rates in a free nation, the first step is to determine the limits set by the non-aggression principle on these phenomena. That is, we must distinguish between transactions that are enforceable in the courts and transactions that involve theft or fraud. Then, when we know what is allowed and what is not allowed in a free market, we can use the natural laws of economics, elaborated most rigorously by the Austrian School of economists, to analyze the practices that are allowed and try to make predictions about which practices are likely to prevail.
This paper is my attempt to take the first step—to determine what business transactions are allowed by the non-aggression principle. In keeping with the topic of this FNF Forum, I am only concerned here with how the non-aggression principle restricts business practices in the general areas of creating money, saving money (banking), loaning money (financing), paying off loans, and forcing people to work. (I include forcing people to work as a topic because it is related to the topic of paying off loans.) I leave it to others who know more than I do about investments (anybody at random would qualify) to make predictions about the evolution of these business practices in a free nation.
Before people can begin to trade property titles legitimately, that is, before a free market can begin to operate, people have to acquire property titles in a manner that is consistent with the non-aggression principle. If people don't have legitimate property titles to exchange in the first place they can't legitimately exchange them, and a free market cannot exist. In my paper "A Theory of Property Rights for a Free Nation" (Formulations Vol. V, No. 2), I explain how initial property titles can be obtained in a way that is consistent with the non-aggression principle. The current paper assumes that the theory of property rights developed in my previous paper is essentially correct.
Creating Money
In a free nation the will of the people, so to speak, as expressed in the market, determines what is acceptable as a medium of exchange. There is no fiat money. There are no legal tender laws that require people to accept Federal Reserve Notes or any other particular pieces of paper or any particular commodities as money. Such laws are overruled by the fundamental principle of a free nation's legal system—the non-aggression principle.
It is not necessary for the founders of a free nation to decide in advance what everybody will use as money. Initially, people would probably continue to use existing currencies (U.S. dollars, Swiss francs, British pounds, etc.). Eventually, as banks get established they may begin to issue tokens or certificates of deposit. Since people will not be forced by law to accept anyone's tokens, the acceptance of these tokens as currency will depend on the reputation of the bank that issues them and on other factors that determine market value.
Those who know a lot more about economic behavior than I do predict that gold and certificates of deposit that are redeemable in gold will be selected as the medium of exchange in a free nation. I am inclined to defer to the predictions of Ludwig von Mises and Murray Rothbard about this, but it doesn't matter to me whether these predictions turn out to be accurate. Whatever medium of exchange people select in a free market is what will serve the function of money. I am not a gold bug. I prefer beer. But if the people in the free market settle on gold or silver or any other commodity as the medium of exchange rather than beer, I will go along with them. The non-aggression principle does not prescribe any particular commodity as money other than whichever commodity people freely choose to accept.
Saving Money (Banking)
In a free nation, banking, like everything else, will be a private enterprise. There will be no central bank and no regional or state banks that have special legal privileges, because special legal privileges are overruled by the non-aggression principle.
Banks will be simply warehouses for safeguarding economic goods. The clients will pay these banks a fee for the service of storing and guarding property that they deposit in the banks. The banks will issue certificates of deposit that their clients can redeem at any time. For money deposits, banks may establish checking accounts and issue checkbooks so that their customers can write checks to buy things and avoid the risks involved in carrying other forms of money around.
Banks will not make loans. They would keep 100% of the deposits in their vaults at all times. If they kept less than 100% of the deposits on hand, they would be committing fraud, which is not permitted by the non-aggression principle. Expressions such as "You can bank on it" or "It's like money in the bank" will make sense in a free nation where banks are places for keeping valuables safe.
Loaning Money (Financing)
Presumably, some people and businesses in a free nation will want to borrow money for various reasons. Financial institutions will be established by entrepreneurs to meet the demand for loans. These financial institutions will make contracts that involve risks to themselves and their clients. Investors will loan money to these institutions in exchange for a chance to get the money back in the future with interest. The institutions, in turn, will use the money from the investors to make loans to other people or businesses in exchange for a chance to get the money back in the future with enough interest to pay back their investors and to cover the institution's expenses and to make a return on their investments.
Contracts between a financial institution and its investors and between that financial institution and the people it loans money to would determine who owes what to whom. These contracts should spell out the property rights of the respective parties in the case of loan defaults or they should, at least, specify a procedure such as arbitration for determining property rights when loan payments are not made as scheduled. Otherwise, a financial institution may have higher costs for collecting payments and be less profitable than its competitors.
Since such financial institutions do not keep 100% of their depositors' money in their vaults, they should not be called banks. They should refer to themselves as loaning institutions or some other appropriate name that does not include the word bank—to avoid the appearance of fraud. People who invest in these financial institution should understand that they are risking their money. They should not be led to believe that their money is as safe as if they had deposited it in a bank.
Financial institutions would be free to offer their investors the opportunity to withdraw their money on demand as long as they do not mislead their investors into believing that all of them could do so at the same time, as they could if it were a bank. Financial institutions could offer banking services in addition to loaning services, as long as they keep them separate and manage them under separate rules and clearly disclose to their clients which services operate under banking principles and which ones do not.
In a free nation there would be no usury laws that limit the rate of interest that can be charged by financial institutions or by individuals. The rate of interest for each loan should be specified in the contract for the loan. Usury between consenting adults would be legal, but fraud and deceptive loan contracts would not be legally enforceable.
The general rate of interest for loans will fluctuate with the time preferences of those who choose to risk their money by participating in the loan market. As the interest rate goes up, more people are induced to invest in loans, which increases the money available to be loaned, which lowers the interest rate, which causes fewer people to invest, which reduces the money available to be loaned, which raises the interest rate, which yada, yada, yada, other things being equal, and so on, etc.
Paying Off Loans
Libertarians do not agree on how the non-aggression principle applies to those who fail to pay their debts. If you do not have enough money to pay back a loan when it is due, does the loan contract imply that you have an enforceable obligation to work until you repay the loan? Can you enter into a loan contract that has the potential result of giving someone the right to force you to work? Such a contract could be tantamount to a voluntary slavery contract.
Robert Nozick, during his brief libertarian phase, believed that a free system would allow people to sell themselves into slavery.1 Randy Barnett argues against voluntary slavery but advocates involuntary slavery to force criminals to pay their debts to their victims.2 Murray Rothbard agrees that voluntary slavery contracts are not enforceable, but he regards failure to pay a debt as equivalent to theft, and he regards thieves as having given up their right not to be forced to work and to be imprisoned, if appropriate, until they pay their debts (restitution) and then to be punished on top of that (retribution).3Other libertarians like me regard imprisonment for debt as a violation of the non-aggression principle, whether the prisoner is a criminal or not and whether he signed a voluntary slavery contract or not. Another libertarian view might be to enforce whatever debt-repayment procedure is specified in the loan contract.
These disagreements about when forcing someone to work is an act of aggression are also disagreements about what constitutes a free market. Depending on how we interpret the non-aggression principle, a free market can include or exclude such things as slave markets and debtors’ prisons.
My position is that a loan contract should specify the collateral that is at risk in case of default. The collateral must be alienable property that legitimately belongs to the borrower at the time he negotiates the loan. During the course of the loan, the collateral should not be sold by the borrower or the loaner except as specified in the loan contract or by mutual agreement, and the borrower should not try to use the same collateral to get another loan from another financial institution unless he has permission from the institution that already has a lien on the property and he informs the second institution about the lien. The loan agreement should say that title to the specified collateral goes to the loaner upon failure of the borrower to repay the loan and that title reverts to the borrower when he pays off the loan on schedule. This is an enforceable property right. If the person who defaults on a loan repayment refuses to turn over the collateral, he is committing aggression by physically preventing the new owner from using the collateral. It would be a legitimate act of defense against aggression for the loaner or his agents to use force against the debtor to take possession of the collateral.
However, property that is not alienable or that is not owned by the person seeking to negotiate a loan is not legitimate collateral. For example, I have no right to put up your house as collateral for my loan without your permission. That would be fraud. No legitimate property titles are exchanged by fraud. A loan contract in which the borrower risks collateral that he does not own is not a valid contract, so the money loaned still legally belongs to the loaner and the loaner has the right to use force if necessary to get his money back.
Forcing People to Work
Readers of Formulations already believe that slavery, in many situations, is wrong. So does the American public at large. But libertarians make fewer exceptions than the general public. For example, we recognize military conscription as a form of slavery, whereas, when the draft was enforced, most Americans regarded military service as a duty that citizens (at least males of a certain age) owed to their country. The average American does not think of the draft as slavery, but we libertarians use a broad definition that includes all forms of involuntary servitude, no matter how limited or temporary the servitude may be. So we say that, even though draftees were not bought and sold in slave markets or subjected to the kind of chattel slavery that African Americans endured, draftees were slaves nonetheless, because they were forced into involuntary servitude.
The general public has even more trouble seeing the slavery in other government impositions such as truancy laws, compulsory jury duty, taxes, and court-mandated alimony, child-support, liability, and other payments backed up by threats of imprisonment. The justification for these forms of slavery is that we have all entered into some sort of social contract whereby we have consented to obey the laws enacted by the government for the public good. In other words, these laws that restrict our liberty result from voluntary servitude rather than involuntary servitude and, therefore, they are morally legitimate.
Radical libertarians argue that we did not sign any such contract. So we still have our rights, and the impositions of the federal, state, and local governments are not legitimate. While I agree with this argument, the point I want to make here is that even if we actually did enter into a contract to be slaves, the contract would not be binding. In other words, to enforce so-called "voluntary slavery" contracts violates the non-aggression principle.4
The argument in favor of voluntary slavery goes like this: If you own something, you have the right to sell it, rent it, give it away, risk it, or make any other arrangements regarding the disposition of it, as long as you don't violate the rights of others. It seems to follow from this that if you own your own body, you may unconditionally transfer ownership of it to another person. That person would then be the rightful owner of your body, and he could rent it, sell it, dismember it, destroy it, or, if you are still alive, he could make you his slave. Anything that person wanted to do to you would be his right, and you would be a criminal if you resisted.
Why can't you legitimately transfer ownership of your labor to another person and become a slave such that you would have a legal obligation to obey all your master's commands? Suppose you voluntarily sell yourself into slavery and, after a while, you run away because you are tired of being bossed around. Should law-enforcement agencies try to catch you and return you to your master?
If voluntary slavery is legitimate, it is the ultimate example of placing property rights (of the slave owner) above human rights (of the slave). I tend to agree with Jean Jacques Rousseau's argument that you would have to be an idiot to volunteer to be a slave and if you are an idiot, you are not competent to make contracts. But for those of you who do not regard voluntary slavery contracts as absurd on their face, I offer three additional arguments for your consideration.5
The Moral Autonomy Argument: We can set some limits on voluntary slavery contracts right off the bat as follows:
2. A crime is something that you have no right to do.
3. So you can't legitimately make a contract to commit a crime.
4. If you make a contract to become someone's slave and to obey that person's orders, the contract cannot legitimately include an obligation to obey that person's orders to commit crimes, because you have no right to give that person such authority in the first place.
5. So if your master gives you an order, you still have the duty to decide whether it would be a crime to obey the order, and if the order is an order to commit a crime, you have a duty to disobey the order.
6. If you have a duty, you must have the right to do your duty and you must have ownership and control of your mind and body so that you can perform your duty.
7. So you cannot legitimately give up complete ownership of your mind and body through a voluntary slavery contract. You cannot voluntarily give up your moral autonomy.
The Inalienability Argument: Can you make a valid contract to do something that is intrinsically impossible to do? If not, then voluntary slavery contracts are not legitimate for the following reasons:
2. Consequently, you have the right to alienate parts of it. For example, you could donate an eye or a kidney or some blood to someone who needs it.
3. However, your body as a whole, while you are alive, is different from other kinds of property in ways that are not taken into account by the argument for voluntary slavery. The deliberate actions of your body are controlled by the decisions of your mind (your will). Your mind, therefore, owns the parts of your body that it still controls.
4. This ownership and control cannot be transferred. It is truly an inalienable right. Your body, while you are conscious, is different from all other property, because control of it cannot physically be alienated from your will. When you sell your car, the new owner can drive it without your cooperation—you do not have to steer it or even be in it. But when you sell your body, the new owner cannot get any work out of it without your willing cooperation.
5. To sell something is to give up ownership and control of it.
6. Your purposeful actions such as your labor are controlled by your will, which is inalienable.
7. Therefore you cannot sell your labor and you cannot sell yourself into slavery.
The Fraud Argument: To trade something that you do not legitimately own is a fraud. Here is an argument that voluntary slavery contracts are fraudulent:
2. The labor that you perform in the future will be controlled by the decisions that you make in the future (your future-will).
3. To enter into a voluntary slavery
contract now is to trade ownership and control of your future labor now, which entails trading ownership and control of your future-will along with your body.
4. Such a trade can only be legitimate if you own and control your future-will at the time you trade it. In other words, the argument for voluntary slavery assumes that the person contracting to become a slave has the ability now to control the decisions that he will make in the future concerning the labor that he will perform in the future. If he does not have this ability, the trade is fraudulent.
5. We do carry out plans, perform multi-step tasks, make appointments and keep them, and so on. If we had no such ability we couldn't accomplish much. We expect each other to have some self-control. We rely on each other to keep our promises. Promise-keeping makes cooperation possible and is mutually beneficial.
6. So your current-will has some control over your future-will. Your will is somewhat self-determining.
7. However, your will is not completely self-determining. That is, your intentions when you make a commitment do not have the power to control your future intentions enough to guarantee that you won't change your mind. If we had this power, then everyone who has ever filed for a divorce must have been just kidding or lying when they took their wedding vows. They must not have intended to stay married in the first place. This is clearly not the case. So it must be true that we do not now own and control our future feelings and decisions and labor.
Even though people do make long-range plans and, in many cases, demonstrate continuity in their intentions over time, there are so many instances of people changing their minds that it should be clear that you do not now control your long-range future intentions sufficiently to claim ownership of them. You cannot guarantee that the intentions you have now will be the intentions you have in the future, especially in the distant future.
8. Since, the argument for voluntary slavery assumes that the person contracting to become a slave has the ability now to control the decisions that he will make in the future concerning the labor that he will perform in the future and since he does not have this power, it is fraudulent for him to sell himself into slavery.
The fraud argument applies not only to loan contracts and labor contracts and voluntary slavery contracts, but to any other contracts involving promises to think, feel, or act in a specified way. Promises to stay married to someone, and promises to work for someone or to serve in the armed forces, and solemn oaths to sell your soul to the Devil and worship him forever are all promises involving future thoughts and emotions, which we do not now own or control. No matter how sincere these promises may be, they cannot transfer rights from one person to another. You always retain the right to quit a job, desert the army, get a divorce, or renege on a promise that involves your future-will.
The fraud and the inalienability arguments do not apply to property that can be controlled without your will. For example, it is legitimate to put up your car or your house as collateral for a loan because, unlike your labor, your car and your house are alienable property that are not intrinsically tied to your will. Another person can physically operate your car or live in your house regardless of your past, present, or future intentions. But another person cannot make you work unless you currently choose to work. The decision to work that controls your labor is the decision you make at the time you work—not before or after. Your decision to work or not work at any given moment is physically and logically inalienable; consequently, your right to work or not work is inalienable.
Gambling
All of this might seem to imply that contract labor and loan contracts are on shaky ground, but they really aren't. Only forced labor is illegitimate. "Selling" services and making loans pretty much the way they are done now in market economies can be justified.
In fact, current practices in the United States fit somewhere between my interpretation of the non-aggression principle and Murray Rothbard's. Imprisonment for debt is outlawed by the constitutions of most states. Courts, however, use many ingenious techniques to get around this. They don't put people in prison for failure to pay debts, they put them in prison for contempt of court or for failure to perform their legal obligations. For example, if you refuse to pay court-decreed alimony you will be pleased to know that you are not put in jail for nonpayment of your debt. You are put in jail for your status as a person who refuses to meet his legal obligations.
Gambling is the model for the legitimate way to make contracts involving your future intentions. Bets can be used innovatively to make your future more secure. For example, you could make a bet with your spouse that for the next 10 years the two of you will continue to live together and to support any children that may result from your union. If you stop living together during that time, title to whatever property you wagered belongs to your spouse. The stakes might be called alimony or child support. Either spouse might risk paying the alimony or child support, depending on the terms of the bet.
Insurance policies are another way to use the gambling-stakes paradigm to make your future more secure. If people in a free nation want to insure themselves against some of the uncertainties of the future, they will create financial incentives for entrepreneurs to create insurance companies, which, if they are sufficiently capitalized with money from investors, can legitimately offer policies to customers to insure them against many contingencies. Insurance policies are wager contracts that spell out in detail who owns what in the event that a specified contingency does or does not occur. An insurance policy is a way to hedge your bets.
Performance bonds are another variation of the gambling-stakes solution to the problem of uncertainty caused by the requirements of moral autonomy and freedom. A performance bond is the stake that you put up when you bet that you will perform services for someone in the future. Performance bonds are often used in the entertainment industry to encourage stars to show up and perform as advertised. The star does not exchange title to his services. Instead, the star makes a bet that he will perform as specified in the contract (the terms of the bet). The general form of the bet is: the star bets something that he owns (a performance bond—usually money) and the booking party (theater owner, movie producer, or whatever) bets something he owns (a performance fee—usually money). The title to the performance bond and the performance fee will belong to whoever wins the bet. The subject of the bet is whether the star will perform as specified in the contract.
To justify labor contracts, we need to look at them from a new point of view. We need to see them as wagers. For example, you do not exchange title to your body and its labor for money. Instead, you make a bet with your employer. You bet that you will work for the employer and he bets that you won't. You risk nothing except your reputation for promise-keeping (which you don't own anyway7) and the transformations that you make to the employer's property that result from any labor that you may perform at his request. The employer risks paying you money (wages) and other benefits, and capital investment. If you perform the services as prescribed by the terms of the bet (employment contract) then the employer "loses," and the wages that he wagered (note the similarity between these two words8) and the other benefits he risked become your property and the transformations that you made to his property by the labor that you performed become the employer's property. If you decide not to work for the employer (if you quit your job) then you lose (or fail to gain) title to whatever wages and benefits were detailed in the terms of the bet.
Unsecured Loans, Secured Loans, and Risks
You could make unsecured loans to family members and friends, and maybe they will pay you back. If they don't, you may have an enforceable claim to the money in their possession, but you cannot force them to work to pay you back. They have a moral obligation, but not a legal obligation, to work for you. That is, whether they work to pay you back indicates something about their moral character, but they retain the enforceable right to not work. So unsecured loans are very risky. It would be unwise to make such loans unless you are motivated more by charity than by the prospect of financial gain—and you can afford to lose the money and still meet your own obligations.
To increase the chances of reaping financial gains by loaning money, you should only loan money to people who put up enough collateral to satisfy you. Then, if they fail to pay their debts, the collateral that they wagered becomes your property and you are sufficiently reimbursed.
Conclusion
The laws of a free nation would not honor slavery contracts or allow people to be imprisoned for failure to pay their debts. Instead, the laws would uphold contracts involving performance bonds, insurance policies, and other wagers and trades that pertain to alienable property already owned by the parties to the transaction.
In summary, in a free nation there
will be no fiat money, central bank, fractional-reserve banks, usury laws,
or debtors’ prisons because these phenomena are outlawed by the non-aggression
principle that makes a free nation possible. D
Notes
1 Robert Nozick, Anarchy, State, and Utopia p.331
2 For Randy Barnett's argument against voluntary slavery see The Structure of Liberty pp. 77-82. For his advocacy of imprisonment for criminals as a means to force them to pay restitution see The Structure of Liberty pp. 176-184.
3 See Man, Economy, and State pp. 154-155.
4 There are other forms of slavery that most people, including most libertarians, condone (for example, imprisonment of criminals as a form of punishment). This paper does not address these other forms of slavery. For my arguments against punishment see "The Anticrime Industry" and "The State as Penalizer" in Formulations Vol. IV, No, 1 and Vol. III, No. 4 respectively.
5 If my arguments against slavery contracts confuse or fail to persuade you, maybe Roderick Long's argument would be more to your liking. See "Slavery Contracts and Inalienable Rights: A Formulation" (Formulations, Vol. II, No. 2).
6 Randy Barnett, The Structure of Liberty, p. 80.
7 Your reputation consists of the opinions that other people have about you, which is their property not yours.
8 Wage is the Middle English word for pledge in the sense of a payment (usually money) for labor or services (usually according to contract or on an hourly, daily or piecework basis) and it is the Middle English word for pledge or stake in the sense of something (as a sum of money) risked on an uncertain event. See Meriam-Webster's Collegiate Dictionary 10th edition.
Roy is pleased to announce that
both of his grown-up, libertarian sons are now living in Raleigh. Jesse
has been in Raleigh since 1994. Matthew moved to Raleigh from Florida in
January during the biggest blizzard ever recorded here.
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