In another thread, Maxliberty makes the claim that Austrians would like to outlaw fractional-reserve banking. This is not true since it is impossible to objectively differentiate between ordinary risks that any business must take on in the course of its operation and fractional-reserve fraud. In the extreme case that exists in the US system where just 1/10th of money on deposit is held in reserve, the system is clearly fraudulent and I think Rothbard is right that it should be treated as blatant violation of warehousing law.
However, the primary means of rectifying fractional-reserve banking is not legal recourse (this being reserved for the most egregious cases) but insolvency brought on by bank runs. Bank runs are the Rothbardian antidote to fractional-reserve banking. There is no need to outlaw fractional-reserve banking per se.
Clayton -
as it operates today (if what i read at mises sites is true), anyone who believes a bank has at all times their deposits is being deceived.
if one knows that deposits are not held in account and deposits anyway then i cant say that fraud takes place.
if a government makes people accept anothers credit that they dont really trust…well thats just evil.
Well, it depends on the nature of the contract between the depositor and the bank. Remember that the bank is a caretaker or bailor of the depositor’s money. It is the bank who is to be held responsible (legally responsible) for losing the depositor’s money. Now, it is possible the bank could go out of business due to not offering products and services that people want at prices people want to pay. In this case, the bank’s assets should be parceled out to depositors and creditors in a bankruptcy proceeding, as would occur in the case of any other business failure.
The bank could contract with depositors in two different possible ways. In the first way, the bank could write a contract to “repay the depositor, on demand, the amount of his desposit.” In this case, the bank is not committing fraud if it does not hold the depositor’s money on hand since the bank has not contracted to keep it on hand, even though the bank has agreed to repay on demand. It is only if the bank is not able to repay on demand (and therefore does not) that the bank would be in breach of contract. However, if the bank wrote a contract to “keep/store the depositor’s money until the depositor again demands it” then the bank is in breach of contract if it loans out the depositor’s money, even if it gets the money back in time to satisfy the depositor’s withdrawals.
Next, ask yourself, as a consumer, which contract would you prefer? A contract that promises repayment on demand (but says nothing about where the money will be in the meantime) or a contract that promises to store the deposits until such time as you demand them? You could say, “Well, the first contract would probably have an interest rate to incentivize its adoption” - but that interest rate offer could not be any better than what can be earned on a certificate of deposit, with the advantage that a CD has a definite time horizon. In other words, the market would select for deposit contracts that specify that the bank will store deposits until such time as the depositor returns to withdraw them. Only monies which the depositor releases to the bank’s discretion for investment (through CDs or other time deposit methods) would, in turn, be loaned out. Fractional-reserve is fraudulent and every fractional-reserve bank or banking system will fail in the long run. Only a failure to truly comprehend the nature of fractional-reserves can result in the belief that the market would produce fractional-reserve banking except as con schemes.
Clayton -
i did write “if one knows…”