My knee-jerk thoughts are that time and reputation would drive legalized fractional reserve banking to be such a small sector of the industry that it wouldn’t be very significant in the economy, sort of like if labor unions were to compete without government privilege (not a strict parallel).
Correct, the free market would drive fractional reserve banks to a minor type of bank-but one that might appeal to some if such banks could manage this type of bank and provide higher rates due to the additional risk
Both Mises and Rothbard (especially Mises) argued that with a purely market economy (with no legal privileges for banks), banks that practice fractional reserves would be forced by competitive pressures to keep nearly 100 percent reserves. Joe Salerno makes his case that Mises was a currency school, free banker in this talk. (Joe’s article on the topic is forthcoming.)
Thanks Jeff and CSA
I read Rothbard where he rails against fractional reserve banking, but I suppose as you point out he is against the government sanctioning that type of banking.
I think that market pressures might not pressure banks to keep 100pct reserves, but rather pressure banks to offer more interest and greater disclosure about their balance sheets.
The elimination of the fractional reserve banking is a misnomer, It should be the elimination of legal protection for such a racket.