Reply To: Fractional Reserve Banking


So far in this course I’ve learned that fractional reserve banking and fiduciary media are not considered part of the unhampered market economy.

What about Free Banking where fractional reserves are allowed but are market regulated? Rothbard wrote that competition among banks would lead to a high reserve ratio, but banks might still take on some risk with their customer’s deposits. Are there cases, for example the Suffolk Bank, where fractional lending could exist peacefully in an unhampered market economy? From the wikipedia page on Suffolk Bank:

In his History of Money and Banking in the United States, Murray Rothbard credits the Suffolk Bank with exercising “a stabilizing influence on the New England economy.”[5] John Jay Knox, a former Comptroller of the United States Treasury, stated that the success of the Suffolk Bank demonstrated that,

“the fact is established that private enterprise could be entrusted with the work of redeeming the circulating notes of the banks, and it could thus be done as safely and much more economically than the same service can be performed by the Government.”[6]