words, they issue fiduciary media. By issuing more property titles than property entrustedto them, the banks violate the traditional property rights of their customers.Banks that infringe upon and abuse the property rights of their clients can make verygood profits. The temptation to expand credit is almost irresistible. Moreover, they willtry to expand credit and issue fiduciary media as much as they can possibly get awaywith.This credit expansion brings about another typical feature found in the tragedy of thecommons—external costs. In this case,
everyone in society
is harmed by the pricechanges induced by the issue of fiduciary media. These external costs are not taken intoconsideration by the banks that try to exploit the profit opportunities, because the property rights are not properly defined and defended by the legal system.Exploitation and external costs are similar. Yet there is one important difference betweenthe two. There is virtually no limit in the exploitation of the "un owned," i.e.,environmental properties without clearly defined ownership. However, for the fractionalreserve banks, there is an important limit in the issuing of fiduciary media at the cost of the bank clients. This limit is set by the behavior of the other banks and their clients in afree banking system. More specifically, the credit expansion is limited since banks, viathe clearing system, can force each other into bankruptcy.Let us imagine a simple example. There are two banks: bank A and bank B. Bank Aexpands credit while bank B does not. Money titles issued by bank A are exchanged between clients of bank A and clients of bank B. At some point, the clients of bank B or bank B will demand redemption for the money titles from bank A. Hence, bank A willlose some of its reserves, for instance, gold. As is every fractional reserve bank, bank A isinherently bankrupt; it cannot redeem all the money titles it has issued. Therefore, if bank B and its clients are demanding that bank A redeem the money titles to a degree which itcannot fulfill, Bank A must declare its bankruptcy.Therefore, the clearing system and the clients of other banks demanding redemption setnarrow limits to the issuing of fiduciary media. Banks have a certain incentive to restrictexpansion of fiduciary media to a greater extent than their rival banks, with the final aimto force their competitors into bankruptcy and remain alone in the market. In other words,these banks naturally want to exploit the great profit opportunities offered by theimproperly defined property rights, but they can only expand credit to the extent that therisk of bankruptcy is reasonably avoided. Competition forces them to check their creditexpansion.The question now concerns how the banks can increase the profits from credit expansionwhile keeping the risk of bankruptcy low. The solution, obviously, is to form agreementswith each other in order to avoid the negative consequences of an independent anduncoordinated credit expansion. As a result, the banks set a combined policy of simultaneous credit expansion. These policies permit them to keep their solvency, tomaintain their reserves in relation to one another, and to make huge profits.