Reply To: Fractional Reserve Banking


I would have no problem with Fractional Reserve Banking if it did not have the blessing of the state.

If banks and central banks were not chartered and “allowed” to loan out money based on their reserves in excess of those reserves, they would have to compete in the free market with other investments and bailments.

Clearly you would not bring your valuables to a storage unit on the agreement that the owner of the facility might loan out your stuff and subject to how well he is managing the unit, or how many friends he has in government you might get your stuff back.

In a circumstance where fractional reserve banking is not backed by law, banks engaging in such practices would have to offer interest rates that would be far higher than a bank that safeguarded your cash for perhaps a fee with no interest.
If a bank had decent management they could pull off lending out more money than their depositors give them.

The moral hazard is the central bank or the FDIC will bail out a bank that makes too many mistakes with its depositors money. If these types of banks failed it would send a message to the investors to be more prudent and that there is market risk in lending to a bank who in turn lends out your money in excess of its total amount of deposits.

But I would not out law such banks.

Perversely, through state sanctioning of fractional reserve banking and the FDIC people are convinced that its safe to take next to no interest from banks that take your money and “promise” to pay it back as long as too many other depositors don’t want their money back too at the same time.

For more on fractional reserve banking see
Mises on Money by Gary North
Austrian Economics a Primer by Dr. Eamonn Butler
The Case Against the Fed By Murray Rothbard-calls fractional reserve banking insidious