“Many states have laws on the books prohibiting anyone from making disparaging comments about a particular bank’s financial condition. This sort of talk is thought to be outside free speech because just the slightest rumor can trigger a bank run. Of course, not much of a line needs to develop at the teller window for bankers to get nervous, because they don’t keep much cash around to satisfy withdrawals. Depositor money is lent out or invested, or in the case of J.P. Morgan, used for speculating in London.
In California, there’s been an anti-bank run law on the books since 1917 prohibiting a person from spreading false information about a bank’s condition. In this age of deposit insurance and the FDIC, the law hasn’t been tested much. But along comes Robert Rogers, who as an ex-employee of Summit Bank posted a rant and rave on Craigslist, saying, “I would suggest that anyone that banks at Summit Bank leave before they close.”
Rogers, who served as the bank’s chief credit administrator and vice president, also took the opportunity to post what American Banker describes as “vulgar comments about the bank’s chief executive officer and her son.”
The bank sued Mr. Rogers for libel, to which the ex credit administrator countered that his speech was protected by the First Amendment. So, the lawyers for Summit pulled out a copy of the 1917 law and claimed his statements should not be considered free speech.
But the appeals court in a 30-page opinion said, “We find section 1327 cannot be reconciled with modern constitutional requirements.” The court went on to say, “When analyzed under modern constitutional jurisprudence, the broad provisions of Financial Code section 1327, on their face, impermissibly sweep within their proscriptions speech that cannot be criminally punished.”
The justices said the law is too vague and has too broad a reach, “and said the law lacks a requirement — included in other statutory restrictions on speech — that a speaker’s statement be proven to be malicious,” reports AB.”
Let us think about the series of government interventions that led to the banking industry lobbying to have such a law enacted. Fractional reserve banking is fraud. Thus, fractional reserve banks continually violate the property rights of demand depositors. As Huerta De Soto pointed out, fractional reserve banking requires government intervention in terms of suspension of payments (bank holidays) and ultimately a central bank with a monopoly on legal tender issues to survive. However, the intention of these measures was to provide an aura of confidence that would thwart bank runs and make suspension of payments and/or flooding the economy with paper money actions only to be used in extreme circumstances (war, natural disaster, etc.). Of course the obvious problem is that the entire system depends on the nebulous concept of confidence. Anything that triggers a lack of confidence in even one particular bank can cause a cascade of bank runs that threatens to topple the entire banking system. Hence the need for a statute “prohibiting a person from spreading false information about a bank’s condition”.
As always, one intervention that hampers the workings of the free market causes an unforeseen situation that requires another intervention to correct it. This new intervention starts the cycle again and hence the United States has a code of federal regulations 163,333 pages long (as of 2009).
Let us return to the first intervention, the privileged position of fractional reserve banks, and see what would happen if it were to be repealed. In 100% reserve banking, banks would have to clearly separate demand deposits from loans. Thus, the deposit part of the bank would be nothing more than a glorified safety deposit box while the loan side would clearly indicate the conditions under which customers could claim their money. Note that these two functions could be separated into two distinct companies. Under these conditions, there is now no need for the various government interventions designed to prevent bank runs. Either 100% of the customers money is in the vaults of the bank at all times as demand deposits. Or the customers are forced to obey the language of the contract stipulating the conditions under which they may claim the money they invested in the bank.
When it becomes clear that a current institutional arrangement results in undesirable outcomes, almost always the response is to form a committee and pass yet another law. We can relate this behavior to Bastiat’s classic essay “That Which is Seen, and That Which is Not Seen”. Over 150 years ago, Bastiat noted that what separates the good economist from the bad economist was the ability to see beyond the prompt effects of a given policy initiative. This is the crux of the critique of interventionism.