The Morality of Fractional Reserve Banking
By Bryan Caplan
One of Murray Rothbard’s strangest doctrines is that fractional reserve banking (i.e. virtually all banking with which First World consumers have any direct experience) is inherently fraudulent and should therefore be illegal. As he puts it in The Mystery of Banking:
It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts.
This looks even stranger, though, when you read what Rothbard has to say about fraud in general:
administrator is needed to prevent nonfraudulent sales; if a man simply
sells what he calls “bread,” it must meet the common
definition of bread held by consumers, and not some arbitrary
specification. However, if he specifies the
composition on the loaf, he is liable for prosecution if he is lying.
It must be emphasized that the crime is not lying per se,
which is a moral problem not under the province of a free-market
defense agency, but breaching a contract–taking
someone else’s property under false pretenses and therefore
being guilty of fraud.
If “the bank can lend out your money to other people” is not part of the “common definition” of a bank account, what is? This is especially clear if you remember that most banks do offer a 100% reserve option – called safety deposit boxes. So if Rothbard asked the typical bank customer to explain the difference between a bank account and a safety deposit box, what on earth would he expect him to say?
In the end, Rothbard’s position is as absurd as claiming that it’s fraudulent to sell non-organic bread. Not only do grocers sell organic and non-organic bread side-by-side; non-organic bread is still a lot more popular!