As I understand it the concept of fractional reserves is not applicable to savings & loans banks.
This is at least the only way that it makes sense to me that fractional reserves are fraudulent. It only applies to demand deposits that per defintion is a promise of cash-on-demand which is broken by the bank.
One could have a savings account with no restrictions on withdrawing, save an explicit clause about the right of the bank to refuse service if it’s cash liquidty is especially low that day. The reciept for this savings account is a IOU that can be traded in the market.
However a bank on a free-market would probably be very effecient at managing there liquidity to meet the freqency of the withdrawals an manage to expediate withdrawals in like 99% of cases, and in the remaining cases you will get your money very soon.
This means that the IOUs for these accounts (from the good established and trusted banks) would be extremly near money and trade at a discount that is probably so low that it will costs more to make a difference at all between them and real money. Hence shops may just choose to accept them at face value.
It seems like this would basically elimintate the demand for deposit banks and full reserves. A few individuals may have some cash in a bank deposit box but that is about it. Having your money in a full reserve bank will cost you a fee and your demand for emegency cash won’t be very high due to the convertability of the savings account IOUs (and other solutions to eliminate the need to keep cash on hand like quick credits and insurances).
If there isn’t a demand for full reserves it seems that a free-market banking system would be very similar to the one we have today. Just add a line in the deposit agreement about the banks liquidity, making all transaction accounts into savings accounts, and trade near-money IOUs at there cash value since the difference is so smaller then the transaction costs of making the difference then we get the same thing in practice and it isn’t fraudulent anymore.
There would of course be some drastic differences with all the government intervention removed, trust, well manage loans and higher degree of it’s assets in the banks cash registers. Due to the removed desposit guarantees and guaranteed lender of last resort. But it would in practice economically have the same other flaws as a fractional reserve system, without being fractional reserve.
Corporate clients might have higher demand for actual deposit banks. Still though it seems there would be a lot of IOUs being traded de facto as money. Giving rise to the same volatility in the money supply and problems this causes as a fractional reserve system.
Thoughts?