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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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And you went on a long winded rant...

Which totally avoided the point I was trying to make and didn't address my argument at all.

I'm not endorsing such a system. I'm not endorsing central banks.

I'm saying that loaning out deposits in itself isn't fraudulent because it is well known this is what banks do.

I endorse "Free banking" and no central bank. Just private banks competing each other in an unregulated environment. Laws against fraud are fine, but if the banks aren't hiding or lying about how their banks operate then there is no fraud.

But what happens if the bank

But what happens if the bank fails? The investors just lose?

An armchair analysis of fractional reserve banking

Without it we would probably have much lower growth and less opportunity to do what we want with our lives.

I agree that it is fraudulent in a way that the bank can lend out credit it does not have to many people from their deposits and if the depositors all decide to collect they would end up losing their money.

But if you know the risks of lending/depositing with a bank like this then you should get the returns you deserve. The bank and its executives should also be held accountable for any losses so that it reduces its risk of this kind of event occurring.

The interesting point about fractional reserve banking is that if someone deposits $100,000 in their local bank and the bank then lends out $100,000 to 9 people to build homes in the neighbourhood then this has actually allowed for more wealth in the world (in the form of houses) and then justifies its being lent (assuming none is wasted).

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

Your argument that 9 people were able to build houses

only looks at one side of the coin. True they can build 9 houses now, but as they repay the loan, there are 9 houses that are not being build, that would have been built for less total cost if they had just waited. And what about all the builders who think there is demand for their buildings and expand to meet that demand, only to find that there really isn't such a huge demand and they lose money because they were induced to expand by a false signal from the market. Price changes, boom, and bust are consequences of creating money out of thin air.

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

Edit: Wait...

So you think you know better than the market and the people who want to make a voluntary arrangement with a creditor and build/buy a house now? And you have a tagline/sig that talks about "liberty"?

No, I don't know better.

My point is that the argument was made by Silk Shirt that 9 houses were build now because of fractional reserve banking, but he ignored the fact that the cost of accelerating the building of these houses now on credit was that the credit must be repaid and that drains future purchasing power from the spending stream meaning that these 9 houses can't be built later. If you are going to recognize the benefit, you also must recognize the cost else you make a one sided argument.

And as I do believe in liberty, I believe innocent bystanders should not be deprived of their wealth by a system that essentially tricks them out of their wealth. Builders are tricked into believing there is more demand for houses than there really is so they get punished by the boom bust cycle created by credit expansion and then the necessary contraction that comes from repayment of the credit. Plus the public is punished from inflation of credit as it affects prices that they pay, even if they do not participate in the banking system.

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

Your argument doesn't make sense though...

You do realize, that without the bank, less houses would be built because people who would never have had enough savings to buy one outright would never own one without the bank giving them the loan. So in reality the actual number of houses built and homeowners are increased by the bank making loans.

The loans are made from money which in your ideal world would just be "warehoused" and doing nothing. When banks make loans in a free banking system, real savings are used to fund things that otherwise would never have happened and as a result the wealth of the nation will increase.

Canada's banking system from 1880 to 1900 didn't have the same issues ours did and they had fractional reserve banking. They had competing banks issuing banknotes.

See page 10 fig 2 of:

The issues we had were due to the ban on branch banking which meant banks could not diversity their loans in other locales/regions and they were much more fragile and prone to failure as a result. Also, the federal requirements that banks hold $1.10 in treasuries for every $1 banknote they issue caused a chronic shortage of banknotes.

On the other hand Canada didn't have these regulations and as a result they didn't have the same panics we had and they didn't have a shrinking monetary supply, but rather one that adjusted for market demand (harvest season etc.).

Also all major depressions were created by government/quasi-government agencies never fractional reserve itself. We had no "Great Depression" until central banks came along, and before that any obscene increase in credit was also fueled by government fiat money, not private competing banks issuing banknotes and making loans with real savings.

You've yet to explain how you claiming that fractional reserve in itself is fraud is not accusing people of committing a crime when none may have necessarily occurred. How are you not implying using force against those who would make a voluntary agreement is how this should be handled if you declare it is "fraud"?

If the depositor knows the bank is loaning out his savings and he's getting paid interest on it, I can't see how any rational person can call this in itself "fraud".


If they were trying to keep a reserve ratio of 10% they would only be able to loan out $90,000 once.

Assuming that is we're talking a free banking system without government backstops like a central bank.

It would also add up to $900,000

When the money multiplier is put into effect (at 10% reserve)

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

That only exists with a central bank...

In a system of a free banking that doesn't exist. This effect only exists because of the central bank.

See the graph of the US and Canadian supply of banknotes in the below link. (1880 to 1900)

See figure 2 on page 10 in that .pdf.

In a free banking system any bank that only had $100,000 in reserves tried to loan out $900,000 they would overnight be put out of business by the clearing debt as soon as someone spent them or deposited them at another bank.

They would be on the hook for $800,000 they never had and the market would crush them.

Is that because bank notes would be issued by the individual

bank and not the central bank so that they would know exactly how much paper money they had in relation to physical metals?

Also you share your name with a handy Australian Spin bowler see below'

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

How banknotes in a free banking system work...

Is that they are basically like modern day checks except that the banknotes aren't written to any specific person and can be used like currency.

They got cleared like modern day checks do though. If one bank gets banknotes from another bank they settle the debt as if it were a modern day personal check written by someone who was a customer of another bank.

Make sense now?

So without a central bank, if a bank issues notes too promiscuously then they will get killed by clearing debt. Just like as if someone had written a bunch of bad checks more or less... This is what keeps banks from inflating the supply of banknotes beyond what is prudent in a fractional reserve free banking system.

You should start your own thread with these ideas in mind

Sounds pretty good to me.

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

You are correct

I just started an inflationary bubble!

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

Fractional reserve ONLY happens at the central bank level ...

... it does NOT happen at the local bank down the street.

Think about it: if ALL banks could do it, then no bank would EVER become illiquid. It would be impossible.

The Cypriot banks became insolvent because their managers were boneheads and invested their depositors' money on Greek debt. Once enough people figured out the banks were insolvent, there was a run on the banks, making them illiquid. If they could just print money, that would have been impossible.

Only central banks print money through fractional reserve. I'm not saying that's good or bad, but it MIGHT happen in a free market. It's just that it would be transparent, or people would go elsewhere.

Actually you are a bit off...

It's that conflating what private banks can do when competing with each other without a central bank and somehow comparing that to what central bank can get away with is the issue.

You can't loan out more than deposits without a central bank because any bank that did so would be go under overnight as soon as they get hit with the massive clearing debt they can't pay.

Your wrong, fractional

Your wrong, fractional reserve banking happens at every bank. And fractional reserve banking doesnt print any money at all, it simply adds digital zeros to digital accounts. Thats why when cypriot banks became insolvent and everybody went to get their money there wasnt enough, because they make money out of thin air but just by adding zeros not actually printing physical dollars like the central bank (the FED).

No, that's not true ...

... because if the Cyprus banks could have printed all the money they wanted, they would have done so. If they didn't have the actual Euros (paper currency), they could have just added it electronically to everyone's bank account and allowed them to use debit cards.

Imagine if every bank really could print money. Then the central banks of the world would lose control over it. Each bank would do whatever it wanted.

Theoretically, any bank could print money, but the reality is that today's system is set up so that only central banks can do it, and then only certain central banks.



I give a bank 100 dollars

I give a bank 100 dollars they keep 10 and loan 90 out to another customer. i go back in the next day and ask for my 100 back and they give it to me, they do not call the person they loaned my 90 out to collect it to give back to me, they get to keep their loan and spend it as if it was their money. In one day the bank created 90 dollars out of thin air. How can she even have the slightest idea that fractional reserve banking isn't fraudulent. I haven't read the article but i cant imagine it making much sense anyway.

That's not quite right...

They can't loan out more than deposits because otherwise they'd get nailed with a clearing debt they wouldn't be able to pay as soon as someone deposited the banknote in another bank.

Like it or not

It has been sustained for 100 years and in the UK for over 300 years. No major civil wars in this period or totalitarian rule. Criticisms are still allowed along with demonstrations and protests.

Yes, what goes up must come down and eventually the system will dissolve unless massive spending cuts are made and products are to be produced again along with free floating interest rates. The problem is not so much the paper money but the monetary policies managing it.

Heck, the 50s, 60s, and early 70's were good and there were few complaints. People were more honorable then and so was the system imo. ie. Less red tape, less spending, more freedom, less tax, etc. A cup of coffee was 5 cents lol definitely more bang for the buck. Higher prices also benefit government with higher tax gathering.

Unfortunately the debts are so enormous in magnitude today when rates have no other way to go but up the pain will be very severe. I think sadly this is the only way today to cut public spending otherwise politicians cannot control themselves and government employees.

If a full blown nation wide/world wide depression hits I think there would emerge some kinds of competeing currencies. Until then the money will just keep being printed imo.




"No major civil wars in this period or totalitarian rule."

We have a global banking tyranny threatening to enslave the entire planet into collectivist financial debt brought to you by nearly 100 years of non-stop war.

The ONLY reason fractional reserve banking has survived this long is because we have been in constant war enslaving and destroying any who oppose the OPEC treaty. If we didn't, we wouldn't be able to get our money off our shores, and all of our inflation would hit America instead of the toilet bowl otherwise known as the Middle East.

The only differance between modern fractional reserve banking and what the gold smiths were doing is that ours won't collapse as long as we can export our inflation, get the whole world in on the scandle and destroy/enslave those being ruined by it.

Now that the Petro Dollar is dying, we'll see how long fractional reserve banking lasts.

I Agree, Let The Free Market Decide

OK. I fell for the obvious.

In a free market, there would be competing currencies.

In a totally free market, would you accept counterfeit money? Or would you choose money that is backed by productivity?

Gene Louis
Supporting a Needed Tool for Government Feedback:
A Citizen-Operated Legal System.

Fractional Reserve Banking is a Ponzi Scheme

#1) The best resource that addresses this is Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto:

#2) From what I understand, the issue is not even debateable that Austrian economists including Rothbard, Hoppe etc are against fractional-reserve banking and promote 100% reserve banking.

#3) Before the Federal Reserve System in 1913, we still had booms and busts primarily due to the fraudulent fractional reserve systems.

#4) There is absolutely no reason why a deposit contract and loan contract should be combined:

Read: Why it is Impossible to Equate the Irregular Deposit with the Loan or Mutuum Contract pg 119 of Money, Bank Credit, and Economic Cycles

#5) Fractional-reserve banking is the reason we had bank runs and panics all throughout history. There would be NO bank runs with 100% reserve banking.

#6) Fractional-reserve banking is just as detestable as the Federal Reserve Bank and until people understand this, it won't matter if we End the Fed.

9-11 Media Fakery: Did anyone die on 9-11?

9-11 Actors:

Pysops.. media.. actors.. propagandists... disinfo agents.. fake videos.. fake photos

Do you belive it's OK to make it illegal to loan out deposits?

Even if every time in history anything close to a free market in banking has always been fractional reserve?

History has proven that the consumer would rather get paid interest on their deposits than pay a fee for storage as if it were a warehouse.

Only the most ignorant of the ignorant in the Austrian school think fractional reserve banking is fraud, it's a minority. Rothbard was being dishonest about this.

If we were to make fractional reserve banking illegal, banks would not be meeting the demand for credit whatsoever.

Again: Fractional Reserve is a Fraud & Ponzi Scheme

#1 I'm a voluntaryist & anarchist and I don't believe in governments so I wouldn't 'make' anything illegal. The fractional reserve system is equivalent to selling rat poison as wine. If people want to drink rat poison that's their choice. However in statutory, canon, or common law, governments, churches, and people would judge fractional reserve banking to be a fraud and historically have done so. I'm all for purely free markets and the freedom to sell rat poison or use fractional reserve banking so the first thing I'd do beyond any legal system is to call rat poison, rat poison, and call a fraud a fraud. Whether fraud should be illegal or not is up to whatever type of jurisprudence you advocate. Secondarily if you believe in any decentralized common law system people can make their own judgements and most would consider the fractional-reserve system a fraud if they really understood it.

#2 Please read Jesus Huerta de Soto's book that has as its prime focus fractional reserve banking and understand the difference between the mutuum contract and the deposit contract. It was on the Top 10 all-time recommended list on
The Austrian Economic Professor writes about the history of banking from Greece, to the Hellenist period in Egypt to Rome, to the Christian Callitus Bank, to The Societe Argentariae, Banking in the Late Middle Ages etc etc etc...

#3 It's funny how so many are willing to dismiss the accepted Austrian economic theory that Mises, Rothbard, Hoppe, de Soto etc. have espoused. I'm not saying Wendy McElroy couldn't have superior knowledge than the top Austrian Economists in history, but I figure the top Austrian economists would at least hold a better reputation in general especially in the liberty movement. Even Peter Schiff makes this mistake because he doesn't think it's a fraud.

#4 You don't need a bank to invest capital at risk. You can invest in ANY financial institution that do the exact same thing and get interest or dividends from them. Why would you choose a bank for capital resource allocation? There is no reason to combine the mutuum and deposit contract and somehow think it's some logically necessary part of the monetary system. The idea that commercial banks can create money out of thin air and then charge interest on it is a fraud. Banks instantly become extractors of the people's wealth creation by doing almost NOTHING other than having the power to create money and using the pretense of being capital allocators. Just like all ponzi schemes, fractional reserve banking systems always end in bank runs and fail in the end. The only thing a central banking system like the Federal Reserve does is to institutionalize the fraud so they could keep the fraud going for very very long time via massive debt bubble creation & taxpayer bailouts until ultimately the country collapses.

9-11 Media Fakery: Did anyone die on 9-11?

9-11 Actors:

Pysops.. media.. actors.. propagandists... disinfo agents.. fake videos.. fake photos

How is it fraud or a ponzi?

If the people know the bank is loaning out their deposits and that's part of the contract, how can you call this fraud? You just sound like someone who wants to interfere in a voluntary contract because you don't like fractional reserve!

How is it a ponzi without a central bank? Without a central bank the bank cannot loan out more than it has in deposits or it would go under overnight due to clearing debts it could not settle.

You don't NEED a bank to make investments with risk, but it certainly makes it a lot easier for the average person and it also would be a reduction in efficiency if you were to do away with them. Basically banks wouldn't even exist if they were 100% reserve, they would serve no other function than as to be a warehouse. Who would make loans? Most individuals don't feel like going through the trouble, which is the purpose of a bank. They make loans with the deposits they get to fund those who would want a loan to purchase a house or start a business. Then the bank makes a profit and the depositor gets interest on their deposits. They also get the convenience of using a bank. If banks didn't loan out their deposits the amount of credit available for people to buy a house with or start a business would be greatly reduced and the efficiency of the system would suffer.

This comment by Selgin pretty much sums up the main issue with your arguments:

"in the Scottish system, which was free in all respects pertaining to this issue, no 100% banks operated; nor did 50% banks, or even 20% banks. The universal preference was for banks that made due with the very narrowest cash reserves, but with plenty of capital. True enough, some banks were more risky than others, but that was a matter, not of very different cash reserve ratios, but of different degrees of capitalization and different sorts of non-cash assets."

How come every time in history there has been a mostly free market in banking no 100% reserve banks ever existed?

Also in a free banking system banks don't create money, but rather they issue bank notes which are like modern day checks. They just aren't made out to any specific person and can be used like currency is now. But when the banks settle with each other it would be like they were settling personal checks written by each other's customers. They don't "create money" without a central bank.

You don't seem to even grasp the most basic aspects of a free banking system, you just repeat the SOS and have your friends upvote you as if you've espoused some sort of great wisdom when historically there's no evidence that in a free market banking system consumers would go for 100% reserve banks as that isn't what the consumer has ever demanded.

You just go around slinging the words "fraud" and "ponzi" incorrectly as if this is some sort of argument.

Of course, I don't expect a well reasoned response, just more downvotes from silent people who can't even back up their own position or even be bothered to respond at all, which is the main reason why I have very little respect for most of this site and why I pretty much gave up on it forever ago. It isn't about debate, it's about upvoting and downvoting stuff you "like" or "don't like". It's not debate, it's "whose opinion is more popular".

Did you even read any of the links?

I'm familiar with de Soto and he's wrong about this. Actually read the links I've supplied.

Zero Reserve Banking

We need to recognize that our current system is based on Zero Reserve Banking. In other words, the money is backed by Nothing.

Fractional Reserve Banking implies that money is convertible to a tangible commodity, but that the bank holds only a fraction of what they have promised to pay through their bank notes.