KOL463 | Contracts, Usury, Fractional-Reserve Banking with André Simoni

Kinsella on Liberty Podcast: Episode 463. Update: See also KOL338 | Human Action Podcast Ep. 308 with Jeff Deist: Rothbard on Punishment, Property, and Contract and this Grok analysis of various problems with smart contracts including the fact that most loans are unsecured. A followup discussion with André Simoni of Brazil about some questions he had about applying my/Rothbard’s title-transfer. See also KOL457 | Sheldon Richman & IP; Andre from Brazil re Contract Theory, Student Loan Interest Payments, Bankruptcy, Vagueness, Usury. Grok Shownotes: 0:00–29:42] In this episode of the Kinsella on Liberty podcast (KOL463), Stephan Kinsella engages in a follow-up discussion with André Simoni from Brazil, building on their prior conversation with Sheldon Richman (KOL457). The dialogue begins with André revisiting his concerns about usury, fractional-reserve banking, and the nature of loan contracts, proposing a libertarian limit on interest rates to prevent exploitative lending practices that could lead to effective enslavement. He argues that modern financial systems, including fractional-reserve banking and fiat currency, are interconnected mechanisms designed to promote unsustainable economic activity, drawing insights from Doug French’s book Walk Away. Kinsella challenges André’s framing, particularly his view of loan contracts as bilateral exchanges, asserting instead that they are unilateral title transfers under Rothbard’s title-transfer theory of contract. The discussion delves into the impracticality of “smart contracts” and escrow-based performance bonds, highlighting the inherent uncertainties in contractual damages and future obligations. [29:43–1:39:34] The conversation shifts to a deeper exploration of risk, inalienability, and the moral hazards embedded in modern banking systems. André connects usury and fractional-reserve banking, arguing that banks exploit depositors and borrowers by offloading risk while profiting as intermediaries, creating a system akin to a Ponzi scheme propped up by state interventions like deposit insurance. Kinsella agrees that the current system is corrupt but emphasizes that in a free market with full disclosure, such practices would be unsustainable due to economic realities and the inability to insure against systemic risks. They discuss the legitimacy of loan contracts, with André expressing concern about contracts that shift excessive risk to borrowers, potentially violating inalienability principles. The episode concludes with a discussion on corporations and limited liability, with André suggesting that corporate structures exacerbate risk-shifting, while Kinsella defends the contractual basis of corporations, referencing his prior discussions with Jeff Barr (KOL414, KOL418). Links to further resources and a promise to continue the dialogue are provided.   Youtube Transcript and Detailed Grok Summary below. https://youtu.be/8AfTdeiDJD0 Links: Mercadente, The Illiberal Nature of Limited Liability: A Libertarian Critique Recent Grok conversation Libertarian Answer Man: Legal Entities and Corporations in a Free Society (Feb. 29, 2024) Libertarian Answer Man: Corporations, Trusts, HOAs, and Private Law Codes in a Private Law Society (Nov. 11, 2023) KOL414 | Corporations, Limited Liability, and the Title Transfer Theory of Contract, with Jeff Barr: Part I KOL418 | Corporations, Limited Liability, and the Title Transfer Theory of Contract, with Jeff Barr: Part II On Coinbase, Bitcoin, Fractional-Reserve Banking, and Irregular Deposits UK Proposal for Banking Reform: Fractional-Reserve Banking versus Deposits and Loans Musings on Fractional-Reserve Banking in a Bitcoin Age; Physicalist Shock Absorber Metaphors The Great Fractional Reserve/Freebanking Debate Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles Stephan Kinsella, “The Title-Transfer Theory of Contract,” Papinian Press Working Paper #1 (Sep. 7, 2024) Corporate Personhood, Limited Liability, and Double Taxation Doug French, Walk Away: The Rise and Fall of the Home-Ownership Myth (LFB ebook version) My thoughts on bankruptcy and inalienability: see Areas that need development from libertarian thinkers GROK DETAILED SUMMARY: Detailed Summary for Show Notes with Time Segments Segment 1: Introduction and Usury Concerns (0:00–12:00) Description: André introduces the topics from their prior discussion with Sheldon Richman (KOL457), focusing on usury, loan contracts, and fractional-reserve banking. He proposes a libertarian limit on interest rates to prevent exploitative lending, citing inalienability to argue that excessive interest could enslave borrowers. Kinsella disagrees, framing loan contracts as unilateral title transfers per Rothbard’s theory, not bilateral exchanges as André suggests. André references Doug French’s Walk Away, emphasizing non-recourse loans as a fairer model. Summary: André argues that high interest rates can lead to enslavement, proposing a limit (0:21–0:49). Kinsella challenges André’s bilateral contract view, advocating for Rothbard’s title-transfer theory (1:03–1:17). Discussion of Walk Away highlights non-recourse loans, where only collateral is at risk, as a preferable model (3:35–4:01). Kinsella critiques Bitcoin “smart contracts” and Rothbard’s performance bond concept as impractical due to uncertain damages and future obligations (4:47–6:55). Segment 2: Fractional-Reserve Banking and Economic Instability (12:01–29:42) Description: The conversation shifts to fractional-reserve banking, with André arguing it’s inherently fraudulent and economically unstable, creating more titles than assets. Kinsella agrees it’s unstable but argues it’s not fraudulent with full disclosure, framing it as an economic issue rather than an ethical one. They discuss how banks issue IOUs, not titles, and the uninsurable risks of insolvency. André ties this to a broader critique of fiat currency and central banking, seeing them as mechanisms to extract wealth. Summary: André views fractional-reserve banking as fraud, creating excess titles (8:31–9:50). Kinsella counters that with disclosure, it’s not fraud but economically unviable due to insolvency risks (9:57–12:00). Discussion of IOUs vs. titles, with Kinsella arguing IOUs can’t function as money substitutes due to varying default risks (10:02–13:11). André critiques the “unholy union” of banks, corporations, and government, enabling unsustainable lending (13:38–14:36). Segment 3: Loan Contracts and Risk Allocation (29:43–44:04) Description: André connects usury and fractional-reserve banking, arguing banks profit by shifting risk to depositors and borrowers. He questions the validity of contracts that offload risk excessively, suggesting they resemble slavery contracts. Kinsella insists that in a free market, contracts are valid if disclosed and don’t violate rights, using a hammer-screwdriver exchange example to illustrate title transfers. They explore inalienability, with André arguing that contracts impoverishing borrowers could violate libertarian principles. Summary: André sees banks as risk-free intermediaries, profiting while offloading risk (29:34–29:48). Kinsella defends loan contracts as title transfers, valid with disclosure, using a barter example (31:16–33:24). André argues excessive risk-shifting to borrowers could lead to enslavement, citing inalienability (42:20–43:07). Kinsella acknowledges potential limits but distinguishes them from usury or risk-shifting issues (42:36–44:04). Segment 4: Free Market Banking and Inalienability (44:05–1:00:41) Description: The discussion moves to a hypothetical free market with gold or Bitcoin as money. Kinsella outlines two banking functions: warehousing (safekeeping) and credit intermediation (lending). André agrees warehousing is legitimate but questions credit intermediation’s moral hazards, where banks push risk onto others. They debate negotiability and checks, with Kinsella suggesting the state’s legal system distorts commercial practices to support fractional-reserve banking. André emphasizes inalienability as a limit on exploitative contracts. Summary: Kinsella proposes warehousing and credit intermediation as distinct free market functions (46:00–51:37). André critiques credit intermediation for enabling banks to avoid risk (52:08–52:53). Discussion of negotiability and checks highlights state-backed distortions in banking (57:56–1:00:41). André reiterates inalienability as a safeguard against exploitative contracts (44:36–45:04). Segment 5: Corporations, Limited Liability, and Systemic Issues (1:00:42–1:39:34) Description: The conversation broadens to corporations and limited liability, with André arguing they exacerbate risk-shifting, drawing parallels to banking. Kinsella references discussions with Jeff Barr (KOL414, KOL418), noting some libertarians oppose corporations for separating ownership from liability. André sees this as a logical extension of his critique, advocating for a fair system without such structures. They address linguistic and cultural barriers in Brazilian libertarianism, with André calling for mainstreaming these discussions. The episode ends with plans to follow up and share resources. Summary: André links banking issues to corporations, arguing limited liability enables risk avoidance (1:21:23–1:22:42). Kinsella cites Barr and others’ critiques of corporations, defending their contractual basis (1:20:43–1:23:06). André highlights Brazil’s linguistic barriers, limiting access to nuanced libertarian ideas (1:35:35–1:36:41). Plans for further discussion, with Kinsella offering to connect André with Hapa and share resources (1:37:30–1:39:34).