I was hoping you might be able to explain how the use of fractional reserve banking pushes interests rates below natural rates in an economy with no central bank? If banks were doing this regularly, shouldn’t they go insolvent fairly quickly? Is it chiefly through interbank lending and competition that drives this process? I’m just trying to understand nineteenth century cycles better (not just in US). Thank you very much.
It can be done through lowering the reserve ratio of money against money substitutes. Various methods can be attempted, but the key is generate confidence among bank clientele that redemption can be maintained with lower reserve ratios.
Mises discusses this point in The Theory of Money and Credit in chapters 2-4 of Part 3.
Interbank lending is one method. Another is improving the liquidity of securities markets. Often this will be done by the lobbying the state to provide guarantees. The state can also provide suspension of redemption temporarily. Under the National Banking System, central reserve city bank notes were given legal privileges by the state making them more suitable as a reserve held by city banks and country banks against their notes. This provided some flexibility in the reserve as a source of bank note inflation.
Rothbard discusses some of these techniques in his History of Money and Banking in the U.S.