Sunday, June 3, 2012

Still Not Theft: More On Fractional Reserve Banking — Laissez Faire

There's been a good—and surprisingly passionate—discussion of fractional reserve banking in the comments of Yaron's recent video. A lot of the comments are worth reading, but definitely don't miss this one from Ayn Rand Institute board member Harry Binswanger:

Anonymous apparently neither listened to Yaron nor read any of these comments. What kind of "counterfeiter" tells his trading partners just what his money is and represents?

Listen up anti-FRBers: what if every bank made each depositor, on opening his account, sign a waiver saying he realizes the arrangement and consents to taking the risk? And then what if every check printed by such banks carried notice: "This check is on an account in a fractional reserve bank; in accepting it in payment, you assume the risks involved." Or whatever language you want—flashing neon signs above the banks maybe? WHAT THEN? Where's your fraud, your counterfeiting, your double claims on the same asset?

So what are the anti-FRBers left with, given that this completely ends their claims of fraud? They are left with their ANTI-CAPITALIST economics: the claim that they know better than the market—that they can see that fractional reserve banking is dangerous but those in the market—bankers and their clients—cannot. If they actually accept capitalism, and if they grant there's no force or fraud, they must take the position: let the market sort it out.

Fractional Reserve banking existed and functioned here in the free banking periods of the 19th century. End of story.

Excuse my shortness of temper, but I have been answering the same benighted anti-FRB arguments for some 40 years now.

Meanwhile, for anyone interested in the economics of fractional reserve banking, I can't recommend strongly enough that you check out the work of Lawrence H. White and George Selgin. Selgin in particular has a number of fascinating blog posts on this issue: