Fractional Reserve banking with out the FED

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    Would like your thoughts on the above. I have read rothbard and others about the evils of fractional reserve banking.

    I had a stray thought-fractional reserve banking would not be that bad if there were competing banks that did not engage in the practice.

    In that instance the fractional reserve banks would have to offer higher interest rates and manage their money better and perhaps put time and withdrawal restrictions on their deposits.

    I think like alternative currencies, that fractional reserve banking could work in a free market.

    Am I way off base?


    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.

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