Tuesday, 2 October 2007

Fractional Reserves: Rothbard's Felines.

by Edwin Hesselthwite

That's a very nice beer you're holding there. Are you offering it to me? You are? Excellent, Hoenbraff I believe. Good old Germans, they certainly know how to ferment grain. Now, let me guess: you want to know what happened to Felis Catus, and the barman suggested you come and talk to this sozzled wino over here... Well, I am happy to explain, happy to explain indeed.

Way back before you were born, an old friend of my family — we'll call him Fred — was a little unsatisfied with his job. Worked for a few years, earned a fair sized pile of capital, decided that the time had come to cut out on his own and do something he loved — something with animals. People always like to go on holiday, he thought, so he bought a big house just in the country with a fair amount of land around it and began to develop it into a cattery. His heart and soul went into it: making the cats comfortable, getting them the best food, making sure they got light, and that cats with bad tempers were kept well-separated. He put so much work into that cattery that customers came from far and wide to leave their cats with him. It wasn't long before the money was rolling it, and in no time at all he was running at capacity.

He was trying to work out where to expand to when a smartly dressed local man turned up... This man had been troubled by a mouse problem, heard about the success of the cattery, and had come to enquire if he could rent a cat. Fred was a little taken aback, they weren't his cats after all, so his first reaction was pretty hostile. But when the man handed over some solid references, offered him an affordable rate of return, and guaranteed the cat's well-being against his home... Well, Fred thought it was worth a go. Eight days later the purring cat went back to its owners, contented and with mouse-tail between its teeth. Reflecting on this that evening, Fred began to realise he may have hit gold — and when he followed it up it turned out lots of people had mice problems that a 2 week cat rental would resolve. Soon he was lending out cats left and right, and in no time at all he was getting a pile of cash for looking after the little fur-balls, a pile of cash for hiring them out as predatory carnivores, and had an empty barn out back.

The county council had just instituted a food waste recycling scheme, and within weeks the vermin population of the city had blossomed. Fred's business was being treated as a necessity, and with this many mice, there was simply no way Fred could supply the demand for short term cat rental. With a heavy heart he went to the nearest University and hired a token genius (a physicist with white hair and wide eyes) to help him out. The physicist sat down, scratched his head, thought for a long time and declared "I can solve it for a spherical cat in a vacuum". Immediately he got to work, and after 2 weeks of banging, clanking and sputtering in his subterranean laboratory, he emerged with machine that looked a bit like a centrifuge but took 3 identical boxes and ran on liquid nitrogen. He would place a cat in the first box and bags of flour of identical size and shape in the other 2 boxes. When the machine was turned on, the instrument span at high speed, and upon their final buzzing back down to a stop, the resulting boxes could all be treated as cat-containing. As long as Fred kept one of the boxes closed and in reserve for the original owner (while piping food and water inside, of course), he could give the other two away to people with vermin problems... And everyone was happy — aside from a few slightly dizzy cats.

Well this worked superbly, in fact it worked quite so well that before he knew it Fred was adding more boxes to the machine, and lending up to 5 cats out for every cat deposited. And even with Fred running the best cattery in town, there was space in the market for competitors.

A brief length of time down the line, it was obvious that this was where the trouble had started. One of these start-up competitors had been lending cats to people with less than favourable references, and a cat had been left alone, mistreated, and died of starvation. It became apparent that when one loaned cat dies, all the other cats of that cat-cluster died as well. The disfavoured cattery had 6 dead cats, a sobbing original owner and 4 unhappy renters. When this hit the local-press it was a disaster, and people were returning from their holidays early just to get their cats out from catteries, any cattery. The cats were running you see, and in less than a week all the catterys had seen their business get hurt, hundreds of cat-renters had defaulted on their loans, and the whole thing was a shambles. "Something must be done!" the press said... "Something must be done about the catterys!".

The local council wrote a bi-law, and amongst a paper of stringency and cat care regulations the real guts was that a cap (initially of 4) was applied to the number of cats that could be leant per deposited cat. This cap would be controlled by an independent commission mandated to make sure the cat-supply was optimum (people had become utterly dependent on loaned cats). The Government had acted, the wheels of democracy had ground-fine, and the press were silenced.

At first Fred grumbled about this ugly government intervention, but actually he realised pretty soon that it was solving one of his problems. With unlimited cat-lending he'd been finding it harder and harder to get a good price per loaned cat. There had been so many cats around the town that one house's cat was killing the mice in the neighbouring houses, reducing the overall demand. Much as he hated to admit it, cat lending had been losing its grip.

Well as he got back to business, the local government began to hail this intervention as a triumph. There were enough cats for everyone and stability has been brought to the catonomy. While some experts grumbled about inflation, most people were too happy to care. In an effort to keep his profits up, Fred began negotiating to buy the neighbouring land, reckoning that more cats would equal more profit. And yet, as he expanded, the market-value of cats began to drop again, each cat he added to the total number he held resulted in 4 more cats being added to the economy. He managed to take a nice profit home, but it circumvented the spirit of the government regulations adroitly. As his business grew (and everyone was in favour of his business growing) the loss in value of cats began to snowball. Worse still, his catonomics began to get really lax when one of his assistants — in a particularly dirty piece of sharp practice — started encouraging cat-borrowers to redeposit their rentals and borrow them again. The three extra cats were profitable, and no-one was likely to complain, but no one could make sense of it all any longer.

As double-layer-cat borrowing got more and more common, it became increasingly hard to tell whether any cat was genuine, or a replicant, or even a replicant of a replicant. Yet at the same time, due to the local garbage contractor going bankrupt and the resulting rat problem, the need for cats had never been greater. No one was willing to burst the bubble. As long as Fred and responsible catteries could keep expanding, everyone was happy to find a place for them to keep their 4 to 1 reserves, even if it required shipping cat-boxes across the countryside.

It all came to a head one cold day in November. A man we will call Alex — a tired motorist desperate to get home for dinner — was a little slow on the breaks on the regions main arterial road. With Alex's ABS playing up, he skidded on a patch of ice and drove into the back of one of Fred Associated Catteries's cat-carrying trucks, and the damn thing overturned in the middle of the motorway. A school bus came crashing into the mess, and pretty soon 3 lanes were on fire, with cats screaming in the midst of a raging inferno.

Throughout the land pets and mousers began wailing in agony. They jumped, they bit, they screamed and they screeched. And after the world had washed out its collective ears — and bleeding knees and thighs had been cleansed with alcohol — it became clear that there had been less than half a dozen independent cat-clusters left before the pileup. In a time period of under a day, every cat that anyone knew had died.

As the rats brazenly walked the streets in broad daylight, the people searched the countryside, they contacted their neighbours, every telephone in the district was ringing as the hunt was on for any remaining felines. Finally, in a remote moorland shack, a fat tom called Jack was found, owned by a surly farmer with an old shotgun. Jack's owner was the sort of man who had no need for anyone - he said the old tom helped him flush pheasants — and he had no intention of helping anyone without lubrication. Well after a big, big sale that gave him enough money to coat his older stuffed cats in gold, he was persuaded to trade the old tom over to Fred... And Fred managed to produce an army of surly Jacks, who waged war upon the vermin problem, and ended the rat threat forever...

Happy ending, you think? But a day came three years down the line when Jack died of old age, and a thousand cats vanished instantly. And since that day all we've had to remember Felis Catus are those gold coated stuffed toms, since there will never be another.

So there it is boys, now while we are at it... I happen to have a remarkably successful ferret farm down the road, do you by any chance have a mouse problem?

In tribute to Murray Rothbard's The Mystery Of Banking.


Charles Pooter said...

Nice story, but I can't help thinking that your parable is more complicated than its inspiration! ;)

Edwin Hesselthwite said...

In the history of mankind, nothing has been more complicated than Fractional Reserve Banking.