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Fractional Reserve Banking is not fraudulent

In an article by Wendy McElroy, she argues that not only is fractional reserve banking not fraudulent, but that it would do well in a free market.

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It's accurate, but...

...I wouldn't voluntarily do business or hold assets in a fractional reserve currency in a free market beyond what was required to conduct business with others who did. There's far too much risk of whomever controls the supply of currency to inflate and deflate the currency for their own benefit as clearly shown by every central bank that has ever practiced fractional reserve lending.

Simply depends on the contract.

If it's stated that the bank will only hold part of the deposit, and customer agrees to that..well then there's no fraud.

Theoretically, it would only

Theoretically, it would only be fraudulent if the bank could not procure the money for you on request.

Secondly, in any case, fractional reserve banking, for all its faults, has been a boon for the economy in the past 70+ years.

Plan for eliminating the national debt in 10-20 years:


Specific cuts; defense spending:

interesting article, thanks

I always thought fractional reserve banking (FRB) was fraudulent, but this article may have changed my mind. I guess it comes down to whether the customers are aware of the practice and are depositing their funds with the knowledge that the bank practices FRB.

So I imagine, in a free market, both full reserve banking and FRB would pop up and the free market would sort out which type of bank is more successful. It could be that both types continue to exist. Or it could be that the dangers of bank runs eliminate FRB from the market.

Also, what makes this article interesting to me is that I actually found something to disagree on with Walter Block. Dr. Block, if I want to buy a square circle, who are you to stop me?

"All our words are but crumbs that fall down from the feast of the mind." - Khalil Gibran
"The Perfect Man has no self; the Holy Man has no merit; the Sage has no fame." - Chuang Tzu

Fractional Reserve Banking is not necessarily fraudulent.

John Adams said that bank notes printed in excess of the gold and silver in the vault cheats someone.

Free includes debt-free!

I don't understand what you are saying

That's what fractional reserve banking is. By definition, you print 10x as much money as you actually have.

I don't really know, I am certainly not an economist, and am more interested in learning than arguing. It seems to me like most of the founders (and Ron Paul for that matter) do think fractional reserve lending is fraud, but now I'm not 100% sure why it is necessarily bad.

To expand Goldspan's comment.

It's a question of voluntary or coerced or secret.

Since 1913 it has been a coerced doubling of the money supply every 7.6 years.

If I volunteer to back a bank's paper coupons with my gold and silver, I risk my property. If the bank is imprudent, then a bank run will bankrupt the bank.

Risk and profit: Profit motivates me to support their coupons, risk of losing all tempers my choices.

If it done secret then it is fraud, IMO.

If they claim to be a full reserve bank but are not, that is fraud. Or if they are an 80% reserve bank with 70% reserves, that is fraud.

Walter Block has examined this in detail.

Free includes debt-free!

That seems reasonable, but

That seems reasonable, but doesn't Ron Paul think fractional reserve banking itself is a problem?

Does anyone have any sources to the contrary, or where he explains why it is the case?

Paul is certainly against government sanctioned

He is certainly against government sanctioned fractional reserve banking, especially if their are no competing currencies.
Ron Paul appears in this video.

Free includes debt-free!

it's not necessarily bad

it's only when the government get involved to finance their budget deficits does it become bad, just like anything. Milton Friedman defined corruption as “intrusion into the free market through government regulation”. The Federal Syatem is a government couldn't be more corrupt.

And before all the banking conspires theorist jump though their screen to tell me the Federal Reserve is a Private Bank Cartel……just please realize… don’t become legal until the USG puts it’s stamp of approval on it.

"Before we can ever ask how things might go wrong; we must first explain how they could ever go right"


Localism Says it is not fraud, but it is dangerous

No way can I sum it all up here, but leverage is like fire, a dangerous but extremely useful tool so long as it does not get out of control. Basically leverage has to be limited by law in deposit institutions- with the officers of the bank personally liable for losses and government officials who inspect the banks also personally liable.

The crisis we have seen are not really because of "fractional reserve" banking for this simple reason- there are no reserves. There is no real money anywhere in the system and the real assets have been levered 50 to 1 or even 100 to 1. If leverage were limited to 4-1 or 5-1, we could enjoy some of the financial flexibility of prudent levering without the risk of the banks levering to infinity in an effort to buy up the world.

I have done a poor job of describing the position, but there it is

Localism is for people who can still sleep at night even though somebody they don't know in a city they have never been is doing things differently. ("Localism, A Philosophy of Government" on Amazon for Kindle or Barnes and Noble ebook websites)

Timmay is right

but i would add that a private clearing house is needed to maintain a free banking system. It existed once in this country in the NE. read Rothbard "History of Banking and Money". Specifically the Suffolk County Bank.

Also, the "Greenbacker" need to realize they have been duped and get with the libertarian program, because government issued money with out banks is no better then the system we have now.
Read Gertrude Coogan’s Bluff by Gary North

Fractional reserve banking is equivalent to gun control

Depend on who’s holding the weapon whether it’s good or bad…… the government or the public. How many of you really know that the second amendment is more about keeping the government from forming and maintaining a “standing army” then “your right to bear arms”? That's the reason for a “well-regulated militia” was to keep the newly formed government from having a standing army and the citizens responsibility was given to them in the “right”…….the “right to keep and bear arms”…….here is the exact wording…….

A well-regulated Militia, being necessary to the security of a Free State, the right of the people to keep and bear Arms, shall not be infringed.

So the Anti- Federalist that fought for the “Bill of Right” was telling us that in order to sustain your liberty….do not have a standing army (which they saw as a threat to our liberty). The “well-regulated militia” was to keep the threat of a standing army at bay and to protect our “Liberty”, both foreign and domestic.

The same can be said for fractional reserve banking. Only when a cartel is established by the government for the benefit financing government deficits is fractional reserve banking a threat to our liberty. By privatizing the profits and socializing the losses the government threatens our liberty under the guise of protecting us from the hassle and inconvenience of being responsible for our own choices about which private bank notes maintain their purchasing power, but under ANY AND ALL GOVERNMENT BANKNOTES ARE WE ASSURED OF THE DEPRECATION OF OUR PURHASING POWER. (We are the slaves to the master we created)If we fought as hard to keep our “right” of our property of maintaining our purchasing power like we do our guns this debate would not be necessary. Fractional reserve banking practiced in the FREE MARKET (without a cartel) by banks that must operate under the laws of ALL OTHER businesses in this country that if they cannot pay their obligations (redeem paper notes on demand for specie) they are insolvent and should go out of business. It is the responsibility of the CITIZENRY to defend the purchasing power of their property just as it is a “right” for every citizen to defend his person and his family.

With a free banking system and a real bill doctrine of the fractional reserve lending we could have a system where we are not being plunder by our government……..this is how the debate should be formed….and stop debating the merits of fractional reserves banking……it makes you all sound smart but solves nothing.

PS if you want to read about the root debate of fractional reserve banking research “The Currency School vs The Banking School” debate in Great Britain. The CS believed that if you required a bank to hold a certain amount as a reserves that would restrict bank note expansion…..The BS believed if you maintained the requirement of species on demand from banknote holders this would restrict banknote issuance. But in the end fractional reserve banking is all about the extension of credit and without a reestablishment of the disintermedation laws and the return of Glass Stiegel…’s all hopeless…..the Fed is going to default on the dollar……the USG will pays it bills with worthless paper……and we will become Argentina, and the USG will have some badass weapons that we can’t compete against……so much for the Second Amendment.

"Before we can ever ask how things might go wrong; we must first explain how they could ever go right"


Fraud ~ Example: Banks bought world economy w/ your promise...

Example: Money-Changers bought the whole damn world economy with your promise to pay.

Your promise to pay is but a slice of a slice... A fraction. A derivative story, since 1913.

CivilCode La. art. 1S47. Fraud: In the sense of a court of equity, properly Includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another.
The Law Dictionary Featuring Black's Law Dictionary Free Online Legal Dictionary 2nd Ed. (Black's Law Dictionary, 5th Edition, hard cover pictured)

Fractional Reserve: Theft is 9/10 of the Law. End the Fed: Loaning you blind, since 1913.

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

I didn't watch the video, but

Any system, whether it's called fractional reserve banking or something else, cannot be involved in a free market. It's not a free market if the market is being manipulated, is it?

What manipulation?

Without a central bank there is no manipulation.

If the depositor knows the bank lends out the money and in return they earn interest on the deposits they make then where is the manipulation?

Free markets operate on voluntary agreements, you can't just say that some voluntary agreements are not OK because you don't like it.

The FED controls

Interest rates and the amount of fiat currency in supply. Does a free market dictate those terms? Absolutely not, it's decided by the consumers using it.

The fed is a central bank.

The fed is a central bank. Read the first line of what you replied to :/


Someone just voted down all of my comments in this thread without actually making a response to any of my arguments. All of them went down one vote, went to neutral when they were +1, or negative when they were neutral.

Oh well, if an echo chamber is what you want, and echo chamber is what you'll get. If you aren't going to argue with me, and instead just downvote my comments then you can have your echo chamber.


I downvoted this post because

I downvoted this post because I am sick of people complaining about getting downvoted and creating drama out of nothing. It's other peoples' opinions. Deal with it.

This is FRAUD....

Because one small group are given a monopoly on the power to create money [from thin air]. Then inject that money [from thin air] into their own banking cartels.

fraud fraud fraud fraud fraud.


"Take hold of the future or the future will take hold of you." -- Patrick Dixon

We're not arguing central banks are good...

And we aren't arguing banks should be able to make money out of thin air. We believe that banks should be able to loan out the real savings of their depositors if that's the arrangement they have with the depositor.

In the scenario I'm talking about there is no fraud involved.

Do you believe that a central bank is necessary for fractional

reserve banking?

Just look a one local bank in a system without a central bank. Assume gold coins are money in that society. If you bring in gold coins to the bank they give you bank notes or a checking account balance and place the gold coins in their vault.

Customer B walks in to borrow to buy a new car. What does the bank give him? They create a checking account balance for him and in exchange he signs a note payable to them. At that point the bank still has the gold coins in their vault as a reserve but they owe against that reserve the sum of the bank credit they gave you and the bank credit they gave customer B. This is fractional reserve banking as it has always been carried out. No central bank is necessary. That single bank create "money" by loaning it into circulation. They have not loaned out anyone's gold. They have used the gold as a reserve against the few claims they know from experience will be made against the actual gold in their vault.

What a central bank does is to allow many individual banks to participate in fractional reserve banking on a larger scale because the central bank can create credit for the system as a whole as the central bank credit becomes a reserve to the member banks because their own checking accounts at the central bank are part of the reserve they use against checks drawn on them and deposited in other member banks.

You say that people voluntarily participate in the system we have in the US today. Is it voluntary if there is no alternative? Could you operate a business or participate in commerce with others without at a minimum using Federal Reserve Notes or a checking account at a local bank? You can't as a practical matter use any other form of money because there is none save the debased coins we use for small transactions and for change. The money we have available is bank credit; that is it. So don't give me this crap that we are entering into a voluntary transaction when we deal with banks.

If you think that debasement of a societies money isn't fraud, then I question your sanity. The only difference between a society with fractional reserve banking without a central bank and fractional reserve banking with a central bank is the size and effectiveness of the fraud. A central bank allows the fraud to operate on steroids.

"Bend over and grab your ankles" should be etched in stone at the entrance to every government building and every government office.

It is fraud

Every system of fractional reserve banking in history has created bubbles of credit followed by contraction of credit. This is done because there is never enough money in circulation to pay off the debt, and so the same group of central bankers can consolidate wealth and power to their own advantage.

This is always done through fractional reserve lending.

These bust cycles of fractional reserve lending are unavoidable in any fractional reserve lending system, it happens when people loose confidence in the currency. And that is the fraud. It's no different from a ponzi scheme.

Its always done by the central banks so your post saying that were not talking about central banks is BS.

A currency should not be based on CON-FIDENCE. A currency should be "as good as gold", and it was for the first 100 years of this nation until the fraud of the federal reserve was created.

Fractional reserve is all fraud fraud fraud.


"Take hold of the future or the future will take hold of you." -- Patrick Dixon

You've still haven't explained how it is fraud.

If the depositor knows the money is lent out and then they are profiting from the interest paid on their deposit, then how is there fraud?

Then you just go on making unsubstantiated claims that basically all credit leads to bubbles which has nothing to do with fraud or not.

You sound like one of those lefties who believes anyone who profits from his business is evil and then way overstate the profit and power they get (in a free banking system devoid of a central bank at least).

On one hand

we have 'banking', and on the other we have 'investments'.
Loaning what you do not possess is a fraud.

The only ethical banking practice would be full reserve banking.

So you want banks to loan out

So you want banks to loan out only exactly what they have -themselves- and never loan out other peoples' money?

I hope you realize that creates a system where there is absolutely no incentive to safely hold your money, and no potential to profit. Certainly they can't pay interest, because that whole thing is based on the idea that they're using the liquidity for solid investments. The only way to be a successful bank would be to already have a lot of money from something else, and there would be little incentive to even start a bank if we didn't also massively increase the potential interest rates.

I don't have all the answers, but your view comes off to me as simplistic and dismissive of many factors.

linear thinking

What we want is that banks should not be loaning money that does not exist except as digits on a computer.

Not fraud you say - -

If I give you 100 ounces of gold to hold for me, and instead you lend it out to someone else, then what would you call what you have done. You have taken something you were supposed to safeguard for me and instead you have taken a risk with it.

So if I give you 100 ounces of gold to hold, and you give me a receipt, and then you turn around and also give a receipt for 80 ounces of gold you didn't receive in return for his note payable to you, what have you done. You have my 100 ounces of gold and have issued receipts against it totaling a claim for 180 ounces. If he gives (spends with) his receipts to someone else and they then come in and claim 80 of the 100 ounces of my gold, is that fraud?

I think it is fraud in more ways that just the banker issuing more receipts than he has gold to deliver. It is fraud because it causes prices to be bid up as borrowers spend the newly issued receipts, and stimulates people to invest their own money to meet the perceived new demand, only to have higher prices and loan repayments drain demand from the economy and cause losses to the people who were tricked by the higher prices.

You can go through all the mental contortions you want, but if a banking system operates to deprive people of their wealth so that bankers can earn interest on receipts they create out of thin air, then this system unjustly harms people, and that is an evil. Call it what you want, but a society is justified in prohibiting this unstable, unsustainable, predatory, fractional reserve system.

"Bend over and grab your ankles" should be etched in stone at the entrance to every government building and every government office.

See my below comments...

If you know the bank is loaning out deposits, it's part of the contract between the depositor and the bank. How is this fraud? You're the one "contorting" things.

What I don't get is a a bunch of "anarchists" go around and act like it should be illegal to make this voluntary arrangement between depositor and bank. This is why I can't take Rothbard seriously... well one of the reasons.

He claims that in this utopian "anarcho-capitalist" society, no one would do fractional reserve banking, but the only free market banking systems that ever existed were all very highly fractional reserve.

Then he basically says in a system with a government it should be illegal because it's "fraud", even though the bank isn't hiding the fact they loan out deposits from the depositor.

I don't know what else to do besides roll my eyes!

Who writes the contract fine print?

Banks have always enjoyed a privileged position because they were capable of accepting deposits and loaning them to Kings and other royalty.

Go back to the beginning of banking when early bankers were goldsmiths who warehoused gold for people and issued warehouse receipts to the owners. As the system developed, these receipts were exchanged between people rather than the actual gold being exchanged. At some point in history some King wanted to wage a war for which he needed gold and since he made laws by edict, he made a law that it was legal for goldsmiths to create receipts for gold they didn't have, and loan them out. This was the origin of fractional reserve banking because the reserve held as gold was only a fraction of the receipts that claimed the gold. You don't need a central bank to have a fractional reserve banking system, although it makes it function more smoothly when multiple banks are involved; what makes it a fractional reserve system is that there are more claims outstanding that the reserve to be claimed.

Essentially the collusion between the King and the bankers was a fraud committed on the original owners of the gold. Today, this fraud continues to be legalized, and people who out of necessity to operate must have bank accounts have no other choice but to be exposed to this fraud, else they can't practically operate either a business or their personal lives. The fact that they use bank accounts because they really don't have a choice as government and bankers continue to agree on this system of mutual convenience does not change the criminal nature of the system.

It is an absurdity mental contortion to say it is not a fraud since people "freely" enter into contracts with banks.

And how do you explain in moral terms, the consequences of this system to innocent bystanders who suffer the consequences of price changes, boom and bust that the system produces? Are they not deprived of some of their wealth as a consequences of economic effect on prices and booms and busts that come from expansion and contraction of bank credit. Isn't the reality that this fractional reserve system exists for the benefit of bankers who collect interest and spendthrift rulers, governments, and politicians who use bank credit to fund all sorts of foolishness that taxpayers naturally would rebel against were they taxed directly instead of indirectly from inflation of credit.

"Bend over and grab your ankles" should be etched in stone at the entrance to every government building and every government office.