Fractional-Reserve Banking is Not Fraud
By Wendy McElroy - November 13, 2014

Fractional-reserve banking (FRB) is a flash point within libertarianism and a subject that elicits a rare sight: economists becoming emotional. For many in the Austrian school, FRB is theft, counterfeiting and fraud; some critics call for banning it. To other free-market economists, FRB is a practical way to increase and productively use the money supply for finance.

What FRB Is and Is Not

A standard and neutral definition of FRB is, "the practice by which a bank maintains available reserves that represent only a portion of its customers' deposits while lending out or investing the rest." At the same time, the bank pledges to redeem its demand deposits upon request.

FRB is often viewed as an aspect of centralized banking or government regulation. When it is coupled with a centralized bank, then John Maynard Keynes's description is apt; "By this means (FRB), government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

But FRB is a separable practice that has functioned within free banking systems. Indeed, fractional-reserve was standard in the 18th century Scottish free banking system which economist Lawrence H. White described in his classic work Free Banking in Britain – Theory, Experience and Debate 1800-1845. A chapter on Scottish banks is included in order to make a comparison with British ones. White commented: "Scotland had no monetary policy, no central bank, and virtually no political regulation of the banking industry. Entry was completely free and right of note-issue universal." Yet the Scottish FRBs experienced far fewer runs than their British counterparts.

White's work is both fascinating and convincing (to me) but the libertarian part of the debate on FRB is not whether it is efficient but whether it is fraud.

Rothbard argued vehemently that it was. In The Freeman (September and October 1995), he explained: "I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I 'lend out' $10,000 to someone … can I 'lend out' far more than I have? … I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest." Rothbard called this "counterfeiting" because money was created "out of thin air."

He viewed FRB as a fraud against the original depositors. Why? If "the American public… in unison, demanded cash. What would happen? The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers."

There are practical objections to this depiction. It assumes all deposits could be demanded in unison and they are all demand deposits, not term ones. Moreover, the same logic would discredit insurance companies. If too many insurance holders file claims in unison, then the companies go bankrupt or must defer payments. This happens when there is a massive natural disaster. Otherwise, the insurance industry operates in a stable manner over long periods to satisfy average daily needs; the fact that they fail in the face of rare and unpredictable circumstances is part of the risk and uncertainty inherent in any business arrangement. No one argues that insurance industry is fraud, however, because of a few failures due to extraordinary circumstances. FRB operates in a similar manner.

Instead of dwelling on side issues, however, I accept the description of fractional reserve offered by Rothbardians, and I disagree with them on their own terms.

Is FRB Fraud?

Let's say everyone wants 100% of their money at the same time. Has the FRB committed fraud when it cannot deliver?

Fraud is a type of theft. Theft is the use of another person's property without his consent. In fraud, the owner relinquishes some or all control of his property in exchange for a described value. If the value received is not as described, then no legitimate exchange has occurred. Economist Bryan Caplan stated, "If you offer me a Mitsubishi 5500 projector in exchange for $2000, and hand me a box of straw instead, you are using my $2000 without my consent…." It is theft achieved through fraud.

Fraud hinges on the issues of "informed consent" and delivery of the described value. Do you know what you are getting in return for what you pay? And do you get it? If FRB depositors are fully informed, if in exchange for interest they embrace a demand deposit that is substantially lent out, then fraud is not possible. They are simply entrusting money in exchange for a desired interest rate with full knowledge of the risk. By contrast, a 100%-reserve bank would presumably charge a storage fee rather than offer interest. Indeed, this is what happens with the 100%-reserve banking called safe deposit boxes. Otherwise stated, an informed depositor may make a poor choice with whom or where to entrust his money but it would not be fraud; libertarianism does not prohibit poor choices.

As Ayn Rand put it – as quoted in 100 Voices: An Oral History of Ayn Rand – FRB "is appropriate – It is a matter of informed, calculated risk and, in essence, not theft [fraud] at all."

To maintain the accusation of fraud in the presence of informed consent, some Rothbardians expand the definition of 'fraud.' For example, Walter Block claimed: "But, lying is only sufficient for fraud, not necessary. There are other ways to commit fraud besides an outright lie. For example, it is fraudulent for a bank or anyone else to try to sell you a square circle, even if they do not lie about it. Why? Because there is no such thing as a square circle, and, in order for a contract to be a valid one, not only must both parties agree to it (neither lies to the other), but, also, the contract must be in accordance with LOGIC."

This is a strange requirement. A third party would be able to invalidate a contract that has full disclosure and with which the contracting parties are satisfied. As with FRB and insurance policies, quite a few contracts might well involve what some Austrians see as a breach of 'logic.' A man might pay a priest to hear confession and absolve his sins, or pay a psychic to tell his future. As long as both parties accept the logic of the exchange, it is not the business of an atheist third party to invalidate the contract. Just as the free market and libertarianism do not outlaw poor choices nor do they prohibit breaches of logic. A third party simply has no business substituting his logic for that of the contracting parties.

The 19th century individualist anarchist Benjamin Tucker wrestled with much the same issue as the "illogical" contract. Like many contemporaries, Tucker believed that charging interest or rent was "usury" – an immoral monetary practice. He thought such practices were sustained by the state and would naturally disappear under freedom. When confronted with the possibility of people freely choosing to pay interest, Tucker agreed that such contracts would be valid. They would be worthy of scorn but they would be valid because they would be voluntary.

By contrast, Rothbardians such as Block and Murray himself are on record as favoring the prohibition of FRB. Presumably, private defense agencies would drag FR bankers into free-market courts even if no client considers himself to be wronged.


The work of the libertarian monetary theorists White and George Selgin convinced me long ago that FRB would thrive in the free market. Opponents of FRB would disagree but the disagreement is not a libertarian matter but a utilitarian one. The question has become, "Which is the best banking system: fractional or 100% reserve?" Let the free market decide. Let individuals choose.

  • Gary1234

    Probably the clearest discussion of fractional reserve banking I’ve seen anywhere.

    • Thank you, Gary1234. It took me a long time to work out my position on fractional reserve because I am such a Rothbardian that something within me rebels against disagreeing with him. So it was a long process…which tends to lead to clarity, I guess. I look forward to discussing the subject with Daily Bell visitors. I will be dropping by all day.

      • Boysie

        It is unfortunate that you do not realise that if individuals have a dog in the fight – then they are more likely that they will have a very positive word to say about dog fights – You continue to mix apples and oranges while at the same time totally ignoring reality – The reality of the situation is that (a) – “There is NO FREE MARKET – (b) Individuals have NO Choices – (c) All speculative discussions that include the phrase (if apples were oranges are silly) – (c) quoting bankers sympathisiers cannot in any language be regarded as neutral – (d) A fraud is a fraud no matter how you dress it up – of if you chose to become a catholic – or – mormon…this is NOT mathematics that can be formulated – it deals with the absence of morality by certain individuals – who regard themselves as far superior to those that they are defrauding..

      • Jim Prentice

        The Fedderal Reserve Bank is a ‘private bank’ which has partnered with the federal government to issue “Currency” into the hands of the federal government. Currency is not Money, however if FRB was taken out of the hands of the private Bank and run by the federal government as it was by the Colonies it would work just fine.
        Read “The Creature from Jekyll Island” to establish a foundation of understanding of what has happened to the American Economy. At Article I, Section 8, clause 17 of the Constitution for the United States of America the Congress was given “Exclusive Legislative Powers” for the District of Columbia. The Congress in concert with the Banks used this “Exclusive Legislative Power” to create an exclusive currency for their own use and then convinced the American people that the currency was Lawful Money. the system is used to finance all sorts of mischief, in particular all of the ‘wars’ that America has been involved in since the advent of the Federal Reserve Bank.

      • Paul Alves

        Interesting to notice that the FRB system is not ‘open ended’. That is, it is based on lending and therefore it includes a pay back clause somewhere. So, the loans are being paid back all the time, hopefully.
        Once all the loans were made out and an initial inflationary wave has passed, equilibrium is reached, the paybacks and the new loans should balance out, with the loans winning during an economic expansion, and the paybacks winning during a contraction.

        • dave jr

          Yes, but the interest charged (not the problem) on the artificially created inflationary wave (the problem) tilts the balance toward non paybacks which only adds to the inflationary wave. Where is the equibrium? Then people reading the good book falsely accuse the principle of simple time preference interest rate of being the same as usurious compound interest charges. Market based rates for interest payment can be made if market players are truly creating wealth. Compound interest on artificial (non wealth creating) inflationary waves can never be repaid. Never IS open ended, imho.

          • Paul Alves

            Loans are simple and time honored transactions that although rely on trust, are generally benign. The referred inflationary wave has passed a long time ago, about 100 years or so and we are in the equilibrium phase now when loans and paybacks generally balance out, fluctuating to follow market demands.
            It should not be confused with unbridled money printing which has taken place starting mostly in 2003. This is unabashed money creation which is NOT going to be paid back, it is used to prop up the stock market, salvage unfeasible enterprises, and support the legion of people ‘not in the work force’ in the form of welfare. When the dam bursts and the 11.5 Trillion dollars sitting in the US banks comes out and the 750 Trillion in credit derivatives require redemption, we’ll see serious inflation.

          • Friend of John Galt

            It is interesting to note that the Spanish/European conquest of North and South America in the 1500s resulted in a huge inflationary period due to all the hard assets (gold and silver) that the Spanish and other Europeans extracted from the native American population.

            Inflation over the past 400 years was discussed in an article that appeared in September 1977 in Forbes magazine called “The Great Hamburger Paradox.” Forbes constructed an index that measured the average person’s cost of living from about 1490 on forward, identifying periods of significant monetary inflation. Obviously, there are imperfections in the analysis over such a long period. I have a copy of the article tucked away in a filing cabinet — and I was unable to find it online (as it predated “online” by many years). I did find this link: http://books.google.com/books?id=0fA-ItDgSQkC&pg=PA155&lpg=PA155&dq=The+Great+Hamburger+Paradox&source=bl&ots=JFv4Z12QEv&sig=VZc025yT_RXfu6azWsAHj223D58&hl=en&sa=X&ei=XBZlVOraCIOsyASpxIDAAw&ved=0CCAQ6AEwAA#v=onepage&q=The%20Great%20Hamburger%20Paradox&f=false that discusses the article and ties it into the Elliott Wave Principle.

      • Greg Jaxon
  • Sydney

    Excellent! By definition any article or discussion that lays bare one of the most obfuscated topics of all time is, well ……excellent!
    Next up, usury. What a minute, that article has already been written and I read it just a couple days ago. On the payment of interest at plata.com. These two articles bring me great joy and some consternation. These two topics FRB and Interest are really very straight forward. Why then have I been thoroughly confused for decades! Until this past week that is. This is what the DB refers to as the Internet Reformation. No not just the internet, but the excellent writing that the internet diseminates here at the DB for one, has reformed my world view. The flip side of this joy, if we should really go there on a day of such clarity, is why? Ok, here goes. People are people and they either stick together for their group at the expense of everyone outside their group or they think in terms of the value of every individual and the rightness of making clear topics which empower that individual to live a freer life. Congratulations Wendy, your work empowers even the most down trodden of individuals to lead a freer life! Of course this makes me extremely distrustful of the “genius’s” that have attempted to keep these truths under wraps in order to empower the group they identify with the most I guess. Crystal clarity on many, or even most topics, even the most mundane, but on certain topics, no end to the obfuscation, and what I have become hard pressed not to acknowledge as deliberate deception and attempt at subversion. With this as a thermometer I would count as the most important topics of the age, where the keys to economic and monetary freedom lay, to include the payment of interest, FRB, Adam Smiths Real Bills Doctrine (Fekete’s Gold Bill) and free banking and freedom of currency issuance. Mises institute won’t debate Fekete on Gold Bills, per Dr. Fekete himself. This topic must be of great weight. Not only does it make the Mises institute out as a custodian of the dialectic but it elevates the likely importance of this topic. Real/gold Bills probably transfers the time value of currency into the hands of the individual seeking freedom. In any event thank you for a great article and overall body of work. And best wishes to the DB and thanks for a great website.

    • http://www.professorfekete.com/articles%5CAEFGoldBillsDoctrine.pdf This is a link to Fekete’s presentation in four=pages of Gold Bills and why they are desirable. NOTE: it is a .pdf, which many people do not care to download. I’m going to be reading it tonight when I have completed my work for the day.. Thanks for pointing this out to me, Sydney. Frankly, I had no idea this was a controversy. Thanks for the post.

      • Sydney

        Please be careful Wendy, if you don’t agree with them they will probably call you names, like “a beast” of a libertarian. I have a hard time getting that heinous, slander out of my mind. The thing that makes sense to me is the accuser projects their own (hidden) faults or nature on the innocently accused and thereby reveals there true self to the world. I like you (I only know you thru your work) a lot and If this is the hot button topic or even very volatile topic I believe it to be their silence is enough of a statement against them. Or in other words please don’t become their wiping post over this.

  • Gina

    Wendy, I enjoy most of your articles but, I have to disagree with this one. Outside of the point that the uninformed, uneducated masses really believe that all of “their” money is in the bank, the issue of “new” money / currency is used by the bankers and their pals first, and the dilution of purchasing power falls on the middle class and the poor. It is still a form of theft, enriching the bankers, and centralizing power through accumulated wealth at the expense of the people. The centralized accumulation of both power and wealth results in exactly the fascist government / corporate world we now suffer.

    Now, if instead under free banking, a venture capitalist… which is what your are describing… is contracted to pool money for investment with interest and sharing of profits… then the people pooling their money are informed of the conditions of the contract and the risk involved.

    That does not describe today’s depositors and the practice of our current banking system. It is a deceptive system, one that has not been fully explained to most depositors. Very few accounts are offered at interest any longer, so the depositors are denied any sharing in profits of the banks “investments”, and most are moving to only fee based accounts, which should be typical for storage warehouses. Since the banks do not store the money for the depositor who is being charged to keep their money in that bank, then the depositors are further deceived. They are about to receive a further shock after this weekend’s conclusion of the G20 meeting which is expected to outline the coming bail-ins for the newly defined depositor/ capital investors of the banks. Do they know the banks consider them to be investors? I doubt it.

    • Storm

      ” It is still a form of theft, enriching the bankers, and centralizing power through accumulated wealth at the expense of the people.”

      Two major problems I see with this:

      1. There is an unstated assumption that wealth and money are finite.
      2. There is an assumption that relative differences in wealth is itself somehow theft.

      Neither of these is true.

      • Gina

        Storm, the current banking practice is based upon the banker’s stated position of maintaining an elastic currency, and forcing the people through legal tender to use a private credit note. This is not a finite “money” system. It is an infinite currency system which allows the bankers to accumulate an infinite amount of wealth. So much so that they now control most of the world. Relative differences in wealth are allowed in this system by making a piece of paper a standard in place of real money, and that piece of paper has a different purchasing power for those of first use than it does for those who use it last. These are not assumptions, but are the very intended characteristic of the bankers system. The infinite nature of the system is the fraud, as the new currency continually fed into the system is not based upon any real production or growth of the economy. Therefore, every new issue dilutes the real economy and is theft from the productive sector, feeding the parasites who thrive upon it.

        • Storm

          Given what you just said, you carefully explained that you are attacking a straw man position rather than what Wendy carefully explains.

      • Hello Gina. I never have a bad reaction to civil disagreements, as yours most definitely are. You raise several points which I’ll try to address as the day proceeds. Let me begin with one of them.

        You are quite correct in stating that my article does not address the current state of FRB; it is an indefensible practice that involves bogus government guarantees, centralized banking, etc. I am addressing the question of whether FRB could exist in a free market situation without government involvement or centralized banking. I see no reason why it would not and, historically speaking, it has. (Of course, a true free market has not existed but a rough approximation has — again, I refer to Scottish banking pre circa 1825.) In a free market, there would be no centralized power because there would no barrier to entry into banking…except, perhaps, reputation. The increase in money available for finance would be based on people agreeing not merely to deposit into a FRB bank but upon people willing to accept the FRB bank’s currency as opposed to currencies issued by competing banks.

        The resulting increase in productive money available for finance on a free market would be different than the printing-press currency of today in at least two key ways. 1) There would be a natural limitation due to a need to compete with other banks on reputation. Two key issues in competing would be transparency and having enough money in reserve to reasonably meet the demand of those who withdraw funds. 2) There would not be the same trickle-down phenomenon by which those who get the money y first (the elite) benefit while those at the bottom are impoverished. The borrower is the one who benefits from the loan and pays it back directly.

        In essence, the depositor is being issued an IOU by a bank that reasonably expects to be able to meet its obligations. If you believe that is a fraudulent practice, then it is difficult to understand why any IOU is justified.

        But, again, the libertarian issue is not whether it is a good or bad practice but whether it violates anyone’s rights by fraud or in some other manner. I don’t see how people depositing or accepting a private currency violates my rights. Indeed, were I to interfere in their voluntary exchanges, I believe I would be the violator.

        • bouf

          With ‘real’ money, FRB might not be fraud, as both dave jr and brorther John point out above. After reading Wendy’s responses I understand her distinction. An excellent example of this from a time when there was real money is Gen. William T. Sherman’s memoirs (gutenberg.org ebook for free). He operated a bank in California that was an FRB and did not fail, though many of his competitors did during the crises he describes. As an interesting side note, Gen. Sherman claims in the book to be in the Governor’s office at the time the first nugget of gold found in California was brought there to stake a claim.

          But I must disagree with your contention that insurance is not considered fraud by many. All insurance is fraud. Insurance is sold as a way for you to not have to rely on your money or your family’s money if you have a problem. So they steal from everyone, just in case someone may need it someday. I suppose maybe you could call it a ‘service’ and it wouldn’t be fraud. Perhaps there is some point I miss that might make some insurance not fraud, just as we agree some FRB is not; I can’t see it. Yet here’s the rub – up to 65% of your life insurance payment goes directly to the gal that sold and wrote the policy. Other insurance’s aren’t that steep on their compensation, but many of them are close.

          If I tried to band my neighborhood together and self-insure, regulators would say no because I’m ‘under-capitalized’. But as you point out in the article, in the event of a major disaster, so too are the insurance companies under-capitalized. That is to say, they have, like a Mandrake Mechanism FRB, promised more than they can deliver. That is fraud.

          Here in Florida in 2004, I watched first-hand. Checks came very slowly to some folks with ‘better’ insurance, but eventually we were declared a federal disaster area and that let insurers off the hook. Then, as usual, the taxpayer went on the hook. (The ones that already paid out got part of the money back!) Today in Florida we have Citizen’s Insurance, underwritten by me and my fellow Floridians. Big company, actuaries, lotta salaries, and for what if the taxpayer is just going to go on the hook anyway? Let’s just call it socialism, pay nothing to anyone, and accept it as a fact of life when the government debases the currency to pay for everyone to get whole from accidents.

          Nonetheless, a nice article. For the doubters of any kind of honest banking (I am skeptical of this opinion of mine everyday because FRB cannot happen with Bitcoin; is that a flaw or a feature of BTC?), check out Sherman’s Memoirs; he made a living making an FRB work fairly. It’s a compelling read.

          • Marcopolo

            Not here to defend the insurance industry, but insurance is risk transfer, or risk mitigation. Insurance companies have to keep an amount of money (reserves) set aside to pay claims by law based on how much risk they assumed in writing policies.
            If an insurer goes belly up, every state in the union has an insolvency fund, which is funded by a tax on all the insurance companies doing business in that state. When drained, insurance companies have to refill it.
            If you live in Fla, insurers know hurricanes are a when, not an “if.” In such areas, insurers pay other insurers (re insurers) to cover losses above those expected. Being in a declared Fed Disaster Area does not relinquish the obligation of the insurer to pay per the policy. All that it means is that those with no insurance, under insured, or municipalities and utilities that didn’t purchase enough cover, the Fed’s show up with taxpayer money and pay.
            Actuaries make a science of probabilities of events (losses occurring), when, and how to price an individual or a group or a company to pay for losses arising, and make a profit.
            When you bought your life insurance, you were paying a company who has a pretty good idea based on your age, etc. when you’ll likely die. You were “betting” they were wrong and you’re going to die sooner!
            The reason the agent who sold you the policy got a 65% commission for the sale is that 1. That’s a first year commission; they don’t get 65%/yr on your premium (it diminishes to 0 in 2 to 3 years) and 2. on average, you the buyer, will stay with the company for at least 7 years. So, they’ll make their money back and if you forefit your policy before a certain time, you won’t get back much if any you paid in.
            Sometime, based on a variety of circumstances, you’re going to crash your car, have your home blown away, drop dead unexpectedly, etc. That’s called RISK. Life is filled with risk. If you want to transfer that risk to someone else to make you whole again, you’re buying insurance.
            It’s not a Ponzi scheme nor anything like FRB. Insurers pool the money of many to pay the losses of a few. They make their money in the “between time” of collecting and paying out, by investing and even that is limited as to what they can invest in.
            Don’t bring up AIG, as the insurance company of the same name was well capitalized and didn’t need any bailouts. It was AIG, the holding company that owned AIG the insurance company that “misbehaved.”
            The only reason there’s a National Flood Insurance program is for those who choose to live where the likelihood of a catastrophe is a near certainty and no insurer will write a policy, or the premiums would be astronomically high, the Fed’s will use taxpayer money to “insure” your property. The Fed’s support one’s right to behave irrationally.
            So since we live in the land of the free, and you want to live where there’s a 100% chance you’re home will disappear in a natural event, the free market is not at work.
            In a free market, without insurance or a nanny government, the population of Florida might be around 8; or more, if one were willing to build homes to withstand CAT5 hurricanes.
            Weigh the risks in your life and make a decision. You can get a homeowners policy dirt cheap if you’re willing to have $250,000 deductible. Then, you’re your own insurance company…just make sure you get a partner if your home is worth more than $250K, and your neighborhood watch program has a better response time than your local law enforcement.

    • Friend of John Galt

      1. Banks and other financial institutions provide voluminous documentation on the terms and conditions applying to accounts held with those companies. Admittedly, they require a higher level of reading comprehension than perhaps is typical these days (whose fault is that?). Yet these materials are readily available — and I do read them. I also understand that NOTHING that a representative of a bank or other financial company means anything if it is not stated exactly the same way in the written documentation. (Yes, I was once “burned” by an equipment lease deal when the representations made by the salesperson did not match what was clearly written in the documents.) (That’s WHY I read all that verbiage.)

      2. I receive “interest” on my checking and savings accounts. Admittedly, you need to ‘qualify’ by being more affluent than some … see the terms for a “PMA” account at Wells Fargo Bank. Interest is paid based on meeting a significant minimum amount in a combination of checking, savings, brokerage, and/or mortgage balance. The easiest way for most to qualify would be to finance a mortgage through Wells Fargo and have a modest checking/savings balances. Other large banks offer similar interesting bearing accounts. Note: Interest paid is almost infinitesimal thanks to the manipulations of the FED. Still, it beats paying them. (I haven’t paid any bank fees in the past 30 years… there’s always been some way to avoid them…)

  • $6618258

    “FRB ‘is appropriate – It is a matter of informed, calculated risk and, in essence, not theft [fraud] at all.’ ”
    -Yes Wendy McElroy, I think you make a very good case that FRB is not fraud, but within that statement is the requirement for informed consent on the part of the depositor. If the depositor wants 100% of his money back on demand at any time, they would need to pay a fee for the bank to safely store the money (& also a fee of some sort to send the money someplace else when the depositor writes a check on the stored money requesting part of the stored money to be sent someplace else as in the case of a checking account). If the depositor wants to gamble with his money by allowing his money to be lent out to others (who may default on the loan) & thereby earning interest on his deposit as part of his calculated risk, the depositor needs to be aware of that risk for not getting back some or all of his deposited money. As it stands today with interest bearing checking accounts, the vast majority of depositors are unaware of the risk involved. Ditto for interest bearing savings accounts & CDs. Without informed consent, as is most of the cases today, is not there still a problem with FRB today?

    • Hello Frank O. I agree that most depositors today are ignorant of the terms of their deposit. This is not necessarily because the banks do not disclose their terms…they are often readily available in the small print. It is mostly because government has taken it upon itself to guarantee deposits up to a level that handles most accounts. People feel safe due to government assurances. Anyone who has money beyond the insured amount is usually savvy enough to be very familiar with banking practices. To the extent there a fraud going on, it is largely a fraud committed by a government that cannot possibly back the accounts it claims to. And would not if it could, IMO.

      You raise an interesting point, however. How aggressively does a bank need to inform customers of its policies in order for fraud *not* to occur? If it hands out a statement of policy and asks a client to read it before opening an account, is that sufficient? I would argue “yes, it is” because people should take responsibility for the contracts/business arrangements into which they enter.

      On a separate note, I was referring to FRB on a free market rather than to the dog’s breakfast version of the FRB system that exists today. On the free market, fraud would be far less prevalent simply because government would not be present to confuse matters with its faux assurances of “no risk” and utter safety. As to the current system…you may be correct to some degree.

  • Amanda

    Yup. FRB + central government support = fraud. FRB != fraud. Just have to ask if the person taking the risk does so voluntarily.

  • Storm

    Thank you so much for addressing this. It is an issue that I have not engaged many others in as it is outside of my own expertise, but like you I could not see that it was fraud.

    It has seemed to me that those who call it fraud forget the purpose of money: to stand as a uniform marker. The bank still has the marker, and is yes creating more when they make loans, but this is not fraudulent any more than when I trade with my neighbor with a promise of future “payment.” In the case of the neighbor it may be a simple IOU for some beef, milk, pork, eggs, or whatever, or just our agreement without any physical marker at all. We have created new “money” in that sense. The neighbor is using my “money” (in the form of beef, eggs, or whatnot) while I wait for future payment in kind.

    If he is smart, he borrows seed and promises me not only an equal amount of seed, but some of the produce. He can then lend out seed to others and through this process end up with a great deal more than either of us would have had otherwise. The seed acts so as to increase the “money” supply, but yet none are harmed or defrauded.

    I use “money” in quotes for the analogy because I understand that some traits of money are not present in the example, though I believe that the analogy holds.

  • dave jr

    Wendy, By the definition of FRB you cited, all loans come from deposits where only a fraction of deposits are held in reserve. From this premise I’ll agree with your non-fraud view. But from my understanding that is not an accurate description of todays FRB practice. For every dollar put on deposit, the FRB system authorizes itself to create out of thin air, nine more to lend out. The harm comes due to the fact that this is inflationary. Maybe this is less an issue with debt based fiat currency, but it is an issue with redeemable currency because those unrepresented nine notes in circulation devalues the real dollar on deposit; as it skews the volume of currency in circulation from economic reality.
    I will counter Whites argument by stating that authority need not be present for something to be deemed fraudulent. And certainly, merely getting away with it doesn’t make it right.
    In your argument against Rothbard, a comparison to the insurance industry is not valid because insurance companies do not claim to create real property from nothing. They are simply playing a risk managed numbers game. Well, so is FRB I guess. But the risk they are calculating is very different.
    So yes, let the market decide. But misstating the facts is not helpful to those wanting to make informed decisions. Let it be known that with the modern FRB practice, a return to sound money is not possible. And maybe an inflationary debt based fiat currency is OK with most. And let the chips fall where they may. But don’t cover them up!

  • Bruce C

    There is a an important aspect of FRB that was not mentioned here, and which I think DOES constitute fraud if for no other reason than most people don’t know about it.

    Any degree of fractional reserve lending necessarily (mathematically) dilutes the value of the money supply. For example, when there is only a 10% reserve requirement then for every unit of currency that is deposited in a bank, the bank can then “lend” 10 units, but what that actually means is that the bank creates an additional 9 units “out of thin air” and gives it to the borrower. That is 9 units of money that didn’t exist before the loan was settled. That additional money dilutes the value of the total money supply that existed before the loan and will ultimately – in one way or another – lead to price inflation.

    This mechanism is precisely why the Fed (and other central banks) wanted (and still do want) banks to lend more money. Unless the Fed/CBs are willing to inject newly created currency directly into the economy themselves (“helicopter money”)fractional reserve lending by regular banks is the only way to increase the money supply and create price inflation. So far, there has been relatively little conventional bank lending (mortgages, equity loans, un-secured credit issued via credit cards, etc.) so there has been relatively little additional money added to the monetary system, and thus relatively little price inflation – so far.
    Furthermore, the additional 9 units of money created by the banks in the lending process is literally money that is owned by no one. If a borrower fails to repay a bank loan then the only true loss is 10% of the loan balance because the other 90% is fictitious. In fact, the only real “loss” is the opportunity cost of the bank itself because it will not receive interest payments based upon those “counterfeited” units (assuming the depositor is made whole by the FDIC). I believe that is also a form of fraud because interest is being earned on something that really doesn’t exist, or to put it differently (mathematically) it means that banks are actually earning ten times the rate of interest on its depositors money than it claims.

    Fractional Reserve Banking is not benign. However, one could claim that it is based upon statistics ideally, much like the insurance industry, and thus barring unusual events it should usually “work”. However, it is also inherently and necessarily price inflationary and that to me is immoral.

    • Bruce C

      DB: Why did it take11 hours to post my comment?

      • We posted a note about this (see above) apologizing for the glitch in Disqus that sent comments awaiting moderation to some unknown universe until very late last night. And again, verifying one’s account with Disqus sidesteps moderation.

  • Audigger

    Under FRB, It seems to me the fraud is committed on everyone who holds currency that is not part of the lending, borrowing contract. The value of their currency has been devalued until the note is extinguished with no consent asked for. That is where the theft occurs. This mechanism is enormously enabled by debt based flexible currency with continuous expansion.

    • Dan

      Not if the lending institutions created their own notes and disclosed they would be conducting FRB accordingly. Without legal tender laws of course.

  • I agree that Fractional Reserve Banking is not fraud if full disclosure is given. However, why would FRB even exist with full disclosure?

    To me, full disclosure would require the bank’s account manager to say to me, when I open an account with them, that my $1000 deposit is going be held in reserve to guarantee a $10,000 loan lent out at interest and they are going to create the other $9000 out-of-thin-air. The disclosure agreement would be written in bold font, in the first paragraph, that my $1000 is at risk, at 10x its value, to whomever the banker deems a worthy borrower. There would be no “fine print” written in 6 point font legalese buried in paragraph 5 of the disclosure agreement. Full disclosure demands that I as a depositor know what the banker is doing with my money. At that point, I might ask myself if his competitor might put my $1000 at less risk by only lending out $5000. Then I begin to wonder, if he can create money out-of-thin-air, then why can’t I? Why don’t I become my own banker?

    Joe the “baker” is planning on expanding his baking operation, and I know Joe is a good baker, which would make him a good risk, so I could become the banker and use my $1000 as a reserve and lend Joe $10,000 so he could expand his operations.

    So, I approach Joe with my scheme, and he asks for full disclosure. I tell him that I will use my $1000 from savings and create the other $9000 out-of-thin-air. He tells me to go pound sand because he is going to become his own banker and use his $1000 in savings as a reserve, create another $9000 out-of-thin-air himself, and spend $10,000 to expand his own operations.

    Why bother using a banker to store money if he is going to use your money, at risk, at interest, when you could become your own banker and create your own money out-of-thin-air for yourself?

    • Storm

      I can think of dozens of reasons, but risk avoidance would be a very compelling one for most people. Putting the money in the bank creates far less risk than trying to be the bank yourself. The existing bank can eat losses and your own personal money may not be at risk at all as far as you are concerned. You can still get yours back from the Bank unless it fails entirely.

    • cb75075

      Same with insurance or national health care. What happens if everyone gets sick at once.

  • Chris Hulme

    There is something very distasteful about banks creating credit out of thin air to loan to people to buy things.
    If the fractional reserve is 10% it means that 90% of the credit circulating in the system is created out of thin air. This does not seem to be a reputable way to handle the finances of a stable and trustworthy system.
    If we were on a 100% reserve system, then money for investment would have to come from savers, who would be able to command much better interest rates and return on capital.
    If nothing else fractional reserve banking appears to deprive savers of a fair rate of return!

  • Bigschmaltz

    I fully agree with Wendy’s conclusion regarding FRB, as I’m a believer in Ron Paul’s idea of “free banking”.

    However, and with all due respect, I find her arguments a bit muddled & wordy. Additional discussion on the subject can be found here:



    As a side note I think Murray Rothbard was an economic genius, but his ideas
    on FRB were, strangely enough, just simply wrong.

  • Jim Johnson

    Keynes came along just as it became a matter of the survival of all humankind was at stake. Furious corrections were needed on an increasingly short timeline, when proliferation of nuclear weaponry threatened to go rogue. Taking time to find funding for each correction was fatal, and so Keynes came along with a fancy Ponzi Scheme that would allow us to pretend we had the money. Would it result in crisis? Yeah. My bet is they knew this, but recognized and prioritized the absolute most dangerous problems, leaving future generations to deal with the realities they saw no way around.My folks took care of the Nuke Crisis. Our task is to find a way to resolve the funding of it, before Nukes return again, tinier and more deadly.

  • I am posting this on behalf of a reader who is having difficulty with disqus. Lord knows I do on occasion. So here goes….

    ARTHUR WRITES, FRB is not sexy. Nor is it fraud. But how does this concern
    libertarianism? Here’s an alternative view about the premise of fraud
    being an NAP violation.

    “Fraud is a type of theft. Theft is the use of another person’s property without his consent.”

    This fraud-is-theft argument can be deconstructed to reveal its error. Firstly, was the trade voluntary? If we can confirm that the threat of physical violence against person or property was not involved, then the trade was indeed voluntary. Secondly, was there consent to the trade? Consent was given but not for what one party believed they were consenting to. In other words, consent was given but one party was in a confused state while giving consent. We assume they made a trade while being in a confused state without fully realizing they were confused, otherwise they would not have proceeded with the trade. But how is that possible? Is this person a child? We assume no. Are they mentally ill? No. Gullible? Perhaps. Ill-informed? Perhaps. Too lazy to perform due diligence or draft a simple contract with an arbitration clause? Perhaps. Too much in a hurry to do these sensible things and inclined to take a calculated risk instead? Perhaps. But how does justifying force against a trickster to protect such a person concern libertarianism? It does not.

    One more reason that libertarians should have a tolerant position towards fraud and deceit is in acknowledging that every trade always contains a degree of bilateral fraud. This is because
    1. No trade occurs unless each trader believes they are receiving value in excess of what they are giving up.
    2. No trader reveals to their counterpart that they are exchanging unequal values because they self-interestedly want the trade to proceed. Each is secretly willing to give up a certain additional amount but invariably keeps this information hidden.
    3. Therefore, both parties in every trade are deceivers. In my opinion, the initiation of violence against the person or property
    of a fraudster is a violation of NAP. So a libertarian discussion about whether or not FRB is fraud is irrelevant.

    • cb75075

      To answer the poster:

      WHY do you assume all trade results in deception? It could very well be I have an item I don’t need and someone else needs it. I can trade cause I want the money more than the item. Your flaw is assuming all trade is deceit which it is not. Valuing A over B is not deceit.

      1. This is true.
      2. This is bunk and disproven by #1. Again you assume all traders are deceitful. If the items being traded are not worth the trade amount the trade would not occur due to #1. Now some trades are deceitful but hardly all trades are deceitful and trade is NOT based on deceit.
      3. No they are not decievers cause your #2 position is flawed. Its assuming everyone is a d*ck which is typical Hobbesian thinking.

      Your view of trade=deceit would have to be based on the concept that all things have fixed value. I want a guitar, I have eggs. You want eggs, you have a guitar. Us trading eggs for guitars is not deceit since MY personal value of the guitar may not be YOURS. You want eggs more than the guitar. I want the guitar more than the eggs.

      HOW do you define deceit without a universal compare? If all things are marginal utility to each person then there is no ONE VALUE for a guitar or eggs. Its whatever the other wishes to relinquish to get the other.

      And if everyone were liars then you’d hardly want a gov to rule you since the gov would be all liars.

      So your final conclusion does not hold Trade is NOT a violation of NAP. Sure no perfect truthfulness exists but you assume everyone is a liar. That is Hobbesian thinking.

      • Arhur Krolman

        “trade is NOT based on deceit”

        Agreed. Trade is based on anticipated mutual benefit. What I said was that every trade contains a degree of deceit. For example, you said “I have an item I don’t need…I want the money more than the item”. If you don’t need it, why don’t you reveal just how little you need it to the fellow who is about to hand you the money? I know. Because then he might decide to hand you less. And it might be just a tiny, tiny amount of information that you decide to keep secret. But that is technically still deceit.

        What’s wrong with a little deceit anyway? And if you really don’t want to take a chance with a trade you can pay to minimize the risk of fraud. Entrepreneurs are very good at finding (profitable) solutions for people who want to minimize their exposure to fraud: pre-purchase surveys, eBay ratings, credit ratings, private arbitration services etc.

        Hermes was the Greek god to travelers, merchants and thieves. It is said he advised to never lie, but to never tell the whole truth. I think he would understand what I’m getting at. I advise that libertarians stick religiously to keeping the non-aggression principle simple and easy to understand: no initiation of non-consensual violence against person or property. Period. Fooling and being fooled is a consensual adult activity.

        • cb75075

          “What I said was that every trade contains a degree of deceit.”
          No it does not. It may contain an amount of disclosure which maybe irrelevant to the trade.

          “If you don’t need it, why don’t you reveal just how little you need it to the fellow who is about to hand you the money?”

          Perfect example of what I am talking about. I am not deceiving anyone if I offer to sell the item at a disclosed price and the other person agrees to the price. I have not mislead them about the product. I did not sell a box of comic books only to sell a box of straw. I stated a price, the other person agreed. What I would take for the item is irrelevant.

          “And it might be just a tiny, tiny amount of information that you decide to keep secret.” Should I also tell him what I had for breakfast since that is “information”? We made an agreement. I did not mislead him on what he purchased. For example what if I want $1000 for a car and settle for $100. Am I deceitful then because I don’t tell the buyer I really wanted $20,000 for the car?

          “What’s wrong with a little deceit anyway?” What’s wrong is you stating all trade is deceit therefore violates NAP. That would mean NO human interaction could not violate NAP. Clearly this is incorrect. And yes people can mitigate fraud by research etc.

          “Fooling and being fooled is a consensual adult activity.” No it is not since directly LYING is not the same as merely not telling the whole truth. And there is also a difference between not telling the whole truth and not telling what prioce you would really accept. For example if I sell a care and don’t mention it has an oil leak, that is deception. If I don’t tell the buyer I would settle for $100 for the bottom price that’s NOT deception. I didn’t imply to the buyer what I was selling was something it was not. I did not imply to the seller my car functions fine but it actually has an oil leak.

          Simply put the buyer agreed to the price. What I wanted for the price is irrelevant. Maybe I wanted $20,000 for the used car and got $100. In fact one could say any seller WANTS and infinite amount of money for their product.

          • Arhur Krolman

            “If I don’t tell the buyer I would settle for $100 for the bottom price that’s NOT deception.”
            BUYER: I’d like to buy your car. What’s it worth to you?
            SELLER: $1000
            BUYER: Sold.
            Buyer voluntarily hands over $1000, Seller voluntarily hands over the car.
            This is fraud. The Seller lied. The car was actually worth less than $1000 to him. Otherwise he would not have engaged in the trade. Most fellow libertarians today would say that if a trade involves fraud, it is a type of theft. I say no. (There is also the saying “The worst lies are told in silence” btw).
            Fraud and deception are not the problem. The initiation of violence is the problem. For example, a dollar bill is marked as a Federal Reserve promissory note. This is fraud. They simply promise to replace the note with one just like it if you present it to them. But the fraud is not the problem. The problem is that when one tries to launch a competing currency, one is put in a cage at gunpoint.

          • Diocletian

            There is no fraud in this transaction as presented. It is irrelevant what the seller would settle for because the car is worth $1000 to the buyer, and he voluntarily pays that much for it. Likewise, there is no fraud when you buy any item from any retailer. You know that the retailer paid less than the price listed on the item, you are not told the wholesale price (that is really none of your business), yet you willingly pay the higher retail price.

            However, if the buyer purchases the car for $1000 with the assurance from the seller that the car is in good running condition, and the engine subsequently throws a rod because a patch that the seller put on the engine block falls off, thus revealing that the car is not in good running condition, THAT is fraud. The seller stole the buyer’s money by deceiving him about the condition of the car and uses indirect uses of physical force (e.g. physical evasion) or direct use of force (assault and battery) to prevent the buyer from getting his money back.

          • Arhur Krolman

            Do you agree that there are degrees of fraud, say on a scale of 1 to
            100? Perhaps delivering a box of straw instead of a car is 100, the engine patch you describe is a 50 and lying about what the car is worth to you (after the Buyer’s admittedly impertinent question) is a 1?
            Alternatively, do you believe that fraud is binary?

            As you might guess, my answer is that there are indeed degrees of fraud. Most libertarian thinkers define fraud as a trick to obtain consent from another to voluntarily engage in a trade (not defined by contract). I agree. The essential goal of the trickster is to make deceitful representation(s) (either explicitly or in silence)to encourage the dupe to voluntarily believe that he will likely receive a subjective value unbelievably (to an extremely skeptical person) greater than the subjective value of the property he offers in return. Under this definition, every trade contains a degree of fraud. And my position is this: thinking libertarians should agree that tricky fraud, all around us like the air we breathe, is not theft and does not justify retaliatory violence without exposing libertarian theory to the charge of being self-contradictory.

            “Likewise, there is no fraud when you buy any item from any retailer.”
            This is not correct. All marketing, advertising and packaging (the “silent salesman”) contain a degree of fraud. Marketing, advertising and packaging are aimed at a achieving a perception of value in the mind of the Buyer before he voluntarily hands over his money. For example, beer posters often show young, healthy, happy people with lots of friends. The Buyer is encouraged to feel inadequate and imagine that if he purchases this brand of beer he will receive significant value in addition to the calories: his feeling of inadequacy will be relieved. This is fraud. Most advertising works like this.

    • Our apologies to everyone who had difficulty posting today. The problem appears to have been corrected now and comments are out of the ‘lost’ bin. Thanks for your patience.

  • K-Veikko

    > FRB is theft, counterfeiting and fraud

    This view is based on statism. Here we presume that state or its monopoly by default has a higher morality than any (average) citizen. And that state should not or does not use theft, counterfeiting or fraud on any of its activities.

  • Greg Jaxon

    So glad to be able to agree with your ethical opinion of FRB. Were you aware that the original 1913 Federal Reserve Act enumerated just a few things that could be booked as “reserves”, government bonds and mortgages not among them. Indeed the primary asset that had been intended were what has since been called “real bills” and which now are held to be “discredited” in many economists’ eyes using much the same logic as has been thrown against FRB. But the banks you describe primarily “invested” in precisely that kind of commercial paper for its high liquidity and perhaps more importantly for the distributed due diligence that went into verifying the creditworthiness of each merchant on which a bill was drawn. I find the image of a working economy monetizing its own (inevitable) activity gives a compelling human-action basis to this definition of circulation credit and “money”. 100% reserve is no more than warehousing: it does not engage any low level arbitrage of talented credit analysts who do us the service of proving to everyone how well trusted are the actual flows that Bastiat credits with keeping Paris fed, for example.

  • Friend of John Galt

    It would seem that many of the commenters on today’s essay have not seen the movie, It’s a Wonderful Life (first released 68 years ago). In this movie, George Bailey operates a “building and loan” business (that’s essentially what we called “Savings and Loan” businesses back in the 1960s and 1970s. These bank-like businesses were established to take in deposits (demand and time certificates) and then make loans, mostly in mortgages. As the movie made extremely clear, this type of bank-like business was based on fractional reserve … Joe deposits money so that Bill can get a loan to build his home, etc. This system worked quite well for a large number of years, until government regulators allowed “S&Ls” to move into questionable bond investments — ultimately resulting in the “S&L Crisis” of the 1980s. (Extraordinary interest rates at the time did not help.) However, had the regulatory powers not let the S&Ls move into questionable financing, the crisis might never have occurred.

    That said, I do recall opening my first S&L account when I was 19 or so… the terms and conditions printed on the passbook clearly stated that the S&L could withhold payment of a withdrawal for “up to 30 days” should it be necessary for them to cover the requested withdrawal. Having seen “It’s a Wonderful Life”, I understood that this made perfect sense if there were some emotional reasons that a “run” on the S&L might occur.

    As usual, the problem is not with the particular practice — and FRB is the ONLY way that a bank can offer interest payments to depositors — the real problem is that (1) so-called deposit insurance makes depositors insufficiently careful to do due diligence when selecting a financial institution. (2) Regulators often stumble into allowing activities on the part of the banks that offer unrealized risks (such as the credit default swaps behind the 2008-9 financial crisis). Indeed, in nearly every financial panic going back 200 years, at the heart was a government policy that caused the problems. Scotland “free banking system” worked very effectively for a very long time without government oversight or “insurance.”

    The FRAUD in our current system is that which is caused by the government interference — especially visible in the huge fines assessed (recently) against banks that “helped” during the 2008-09 panic by absorbing (essentially) insolvent banks, brokerage services, or mortgage companies. The perfect example is the takeover of Countrywide Mortgage by Bank of America. They have been given massive fines — but the stockholders and officers of Countrywide are gone (having taken their losses), it is the depositors and stockholders (and management) of Bank of America that takes the bad press and pays the “governmental extortion” for wrongdoing by the past management.

  • autonomous

    Is not the FRB a fraud perpetrated by those who have presumed to govern us? First, they invent a scheme to defraud then cover their scheming with legislation and court proceedings, then mal-educate us to not be able to follow their confusing and twisted “reasoning” disguised as informed consent forms even if we happened to always bring a magnifying glass with us to sign on to a bank account. Maybe we should always have a lawyer accompany us to all business transactions. Oh, that’s right, lawyers are trained to never question procedures that have been vetted by the courts. Maybe we should educate ourselves to be able to catch all sleight-of-hand tricks that professional tricksters master.

    Maybe life is giant carnival in which we all participate, and all relationships can be reduced to their bottom-line essence. We are all wolves, but we occasionally take turns putting on a sheep disguise. Is being an honest man merely being a sucker?

    • Arhur Krolman

      I think fraud gets a bad rap being lumped in with theft and violence as an NAP no-no. Imagine the Treasury department makes a huge announcement: From now on, they will cease and desist all threats of violence against person or property BUT will retain the right to commit theft by fraud to collect all tax revenue. Here’s my reaction: Yippee!! I can live with IRS letters like, “You have already WON $1,000,000! Just mail in $10 today to find out how to collect your prize.” Confiscation and jail threats, not so much. How about you?

      P.S. Violence, more than fraud, is used to uphold the fiat currency monopoly under which FRB thrives and we suffer. Just ask the fellow who tried to start his own silver coin currency and is now facing jail time.

      • cb75075

        I’d rather get punched in the arm than my throat cut bu both are still acts of violence.

  • Simon

    I agree with your analysis, but the language used in the banking system helps to confuse people. They “deposit” money in the bank, when the reality is that they make the bank a loan. Were it not for deposit insurance, federal underwriting and so on, we can be sure that banks would compete on the security they offered to their customers and the result would almost certainly be FRB but with a considerably higher reserve ratios. As a minor point, you might care to get your proper nouns right in the future. At the time mentioned, Scotland was (whether you approve or otherwise, in virtue of your last name) part of Britain. Your comparisons should not therefore be between Scotland and Britain – they should be between Scotland and England)

  • Webforager

    Hi Wendy! The subject of FRB is a contentious one in Libertarian circles, no? But it is good to see it addressed again. From my POV, FRB is the expansion of DEBT that has been villainized as inflationary and fraudulent. While it does expand the “money supply” it is, ultimately, the expansion of the monetary base by a singular behemoth and the inherent fragility of this system from which the focus on FRB distracts. The construct of the Sovereign State and it’s necessary effect of abrogating individual consent is what creates this fragile environment and is what needs to be addressed. As for fraud, one only needs to read their banking agreement:

    “You understand that these terms, as we may change or supplement them periodically, are a binding contract between you and us for your deposit account and your deposit relationship. Our deposit relationship with you is that of debtor and creditor. This Agreement and the deposit relationship do not create a fiduciary, quasi-fiduciary or special relationship between us. We owe you only a duty of ordinary care.”

    This is really no different than understanding, for example, the concepts and terms in an insurance contract. Just because it’s banking doesn’t make it a special exemption. I also found, as you, the work of White and Selgin to be most helpful in this regard.

  • As is obvious from the number of comments here Wendy, you have really opened up Pandora’s Box on this one. I do not pretend to understand all of the finer points but I am glad you have brought up the subject. FRB along with the payment of interest (usury to some) is truly one of the murkiest and most easily interpreted/misinterpreted subjects of all time. Even when one looks at Sharia Banking, the attempts that are made there to “get around” interest/usury and still make banking a viable business by allowing the bank to make a profit somehow, end up looking (to me anyway) like just another way to charge interest. This is similar to all of the “interest free” car loans: you can buy the car “interest free” on time payments or pay $3,000 less and buy it for cash. We are just playing with semantics to sell cars on that one. My impression is – and again I do not claim to understand all of this – but my impression is that Prf. Fekete’s/Adam Smith’s Gold Bills Doctrine may be as close to a workable monetary system as we are likely to get. Something similar seemed to work quite well for the European Banking and Commerce systems prior to WW1, and for an extended period of time.

  • Heywood Jablome

    If the depositor and the bank enter into a contract whereby the bank pays so much interest for the use of the depositors money, and no guarantee of protection of the assets by the bank for the depositor is made, how is it fraud if the depositor loses his money, this is the original way banking was done, and banks knew their limits, so as to protect their depositors assets and still make some nominal amount when they lent out money. The leverage was not as egregious as it is today, nor were deposits guaranteed up to a nominal amount, by some diktat of government banking legislation. Based on this kind of arrangement banks had to be much more businesslike as they were not bailed in by depositors or bailed out by the taxpayers, it was a simple contract which has been subverted over the decades by interference from government and central banking interests.

    • cb75075

      Plus there were way more banks that could step in and purchase the debts or bail out the failing bank. The not all eggs in one basket approach. The regs to control FRB have created the worst situation today with more precarious FRB. One thing we do know is gov NEVER works for people, it works for the deepest pocket so of course the banks set the rules. And cause of FRB regs we now have a tiny oligarchy of banks instead of thousands of banks.

  • Bugboy12

    I fully agree with Wendy’s conclusion regarding FRB, as I’m a believer in Ron Paul’s
    idea of “free banking”.

    However, and with all due respect, I find her arguments a bit muddled & wordy.

    Additional discussion on the subject can be found here:



    As a side note I think Murray Rothbard was an economic genius, but his ideas on FRB were, strangely enough, just simply wrong.

    btw daily bell, why is it so difficult to post here?

    • Hmm. Where am I muddled, Bugboy12? Just curious, not hostile.

    • Perhaps not difficult enough. [quote from movie Shooter]

  • Rich A.

    I think the proof of the fraud lies in the incredible wealth that is accured by the bankers. It comes at the expense of the very people they are supposed to be serving by skimming the interest for doing nothing productive and permitting the government to spend like drunken sailors on wars that can never end and causing inflation which robs retirees and pensioners. Don’t tell me you can see the fraud.

    • Hello Rich. I do not think the accumulation of incredible wealth is a proof of fraud but I do agree that current bankers commit theft through the government privileges they enjoy. Indeed, the entire structure of the banking system is an act of theft. The question is whether FRB is a practice that is separable from the current structure and could exist in the free market. I believe it could and would. If so, I’m not sure if bankers would make incredible profits. But, if they did, then I don’t see how the wealth would be fraudulently acquired. Thanks for the post.

  • NAPpy

    I agree with Wendy that FRB should be treated as a separable issue, and that it can exist in a truly free market. That said, I do not agree that it will survive the competition of a truly free market. Here are some articles I’ve collected to help become informed on the banking issue:


  • H. Rearden

    FRB is not fraud because it is common knowledge and thus banks are not defrauding anyone in regard to FRB. There may have been a time in the distant pass at the start of the first banks when FRB was not common knowledge but that time was a very long time ago. FRB existed prior to the existence of central banks and state involvement in the banking and finance industry. In the past prior to central banks when individual banks issued their own money (that is each bank printed their own money) banks regulated the FRB system rather than a central bank regulating the FRB system. This could be accomplished by banks refusing to accept money issued by a bank they believed had created an overly excessive amount of money in relation to it’s deposits. A bank could refuse to accept such money from it’s depositors and loan customers. The reason why banks would do this is because it is in their interest because a bank that has issued an overly excessive amount of money has devalued every banks money because it has excessively devalued (created excessive inflation) the collective money supply. Businesses would also refuse that bank’s money because their bank would refuse it. FRB is not bad per se. It depends on how much banks are loaning out in relation to deposits. The more money that is printed the lesser the value of money. There are countries like Canada in which banks have no legal reserve requirement. In most of those cases banks have a legal capital requirement however.

  • Brent

    I do believe fractional reserve banking is fraud, but I agree with you in regards to your “informed consent” argument and I disagree with Block on this. I believe the issue here is a disagreement on definitions. I define a deposit or demand deposit as a contract where I deposit my money with a bank and I retain ownership of the money. When the bank loans money to a third party, the ownership of the money is transferred to the third party in exchange for a promise to pay back the money at a later date. In fractional reserve banking either the depositor or the recipient of the loan is being defrauded (unless they understand the nature of the contract- then it isn’t really a deposit but a loan). I define fractional reserve banking as fraudulent because by definition fractional reserve banking is loaning out deposits (where the depositor retains ownership of the money) without both the depositor and recipient of the loan understanding the nature of the contract- therefore fraud is committed. If they both understand the nature of the contract then it really isn’t a deposit but a loan. It is perfectly acceptable for any fraction of a loan made to a bank to subsequently be loaned out to a third party. In that case, I disagree with Block that it is unacceptable for the loan to be required to be repayed on demand. While this may be a bad business practice for a bank to loan out money to a third party and simultaneously be required to repay the money, I don’t see how this would be fraudulent, but Block and De Soto go to great lengths in arguing that even this should be fraudulent as it resembles fraction reserve banking. In my own email exchange with De Soto I argued that using his reasoning it would be fraudulent for me to loan $10 to my friend on the condition that he must repay when I ask him to repay it (on demand). His reasoning was that a loan must have a specific loan repayment schedule, otherwise it would too closely resemble fractional reserve banking.

  • Ernie Hopkins

    The key stems on the customer knowing the risk. In today’s world the financial institutions are not only dishonest about the risk, if pressed the customer is assured that the government will cover the banks if anything goes wrong. That statement literally has been proven to be true, although the customer thinks he is what will be covered. The customer is expendable, and no FDIC is not a guarantee. I agree Wendy that it is not inherently fraud, but it is damn tough to get honest bankers.

  • jmafc

    Wendy, I assume you’ve read Rothbard’s “The Mystery of Banking”, in particular Chapter VII, Section 3. Are you saying you disagree with him that the analogy of issuing extra (he calls them “counterfeit”) warehouse receipts to fractional-reserve banking?

    Do you believe that, if Bank X has 10 gold bars from customer A in a safety deposit box and, by making an extra copy of the second key, they are able to “borrow” say 5 bars from the box and lend them out, just making sure to replenish them (from their own vault or from another customer) in case customer comes to check the box, Bank X is not committing fraud? I assume you would consider that fraud, since presumably the deposit box contract states the bank will *not* make an extra copy of the keys.

    Then, do you believe if Bank X has 10 gold bars in a commingled deposit account and have issued a 10 bar warehouse receipt to customer A, it’s not fraud if they make a loan of 15 bars to customer B, even though they may have only say 13 bars in total in the vault (3 owned by the bank), simply because they told A that when she comes looking for her 10 bars, they are *not* guaranteeing they can redeem all of them? Now how could X make a loan 15 bars if there were only 13 in the valult? Simple, the bank can issue a 2 bar warehouse receipt to B, which assuming it’s a negotiable instrument can be used by B to pay others. That, IMHO is the essence of the fraud in fractional-reserve banking.

    One other point: Bitcoin (and I believe other cryptocurrencies as well) tries to ensure against “double spending”, i.e., preventing that X doesn’t transfer 5 BTC to A and then turns around and transfers the same 5 BTC to B. Fractional-reserve banking is very much like “double spending”, i.e., like creating warehouse receipts for non-existent deposits.

    • cb75075

      Didn’t you just contrive that argument? If the depositor knows the bank will lend their gold in return for interest on the gold then its not fraud.

      FRBing might be something to avoid. It might even be a bad idea but if some people voluntarily agree to the practice then its acceptable behavior. I believe Wendy is referring to FRBing in a free market situation and not in this Franken-economy we have now.

      • jmafc

        No, I didn’t just contrive it, but what difference does it make whether I contrived it now or eight years ago. First of all, in essence my argument is what Rothbard argued in “The Mystery of Banking”. Second, I had a similar discussion with Walter Block because IIRC he was insisting that it was fraud even when bank X lent gold out of its own capital holdings.

        In any case, I believe the crucial distinction made by Rothbard is that a deposit is supposed to be a bailment, in other words, a transfer of property for safekeeping, and *not* a debt or loan from the depositor to the bank. I suspect that most people believe that demand deposits (or non-interest bearing checking accounts) are bailments, just like when you deposit valuables in a safe deposit box or, although rare nowadays, give shares of stock to your stockbroker for holding in your account to facilitate subsequent sales.

        I haven’t looked at the legalese behind a checking account to ascertain what it says about monies deposited, but I’m 100% certain that no bank has ever pointed out to me, when opening a checking account (and I’ve opened a few), “hey, be aware we may lend your money to others” or “be aware that we may not be able to honor a withdrawal request or check immediately because we may be short of cash because we tend to lend it out”, which is something that at least some times is mentioned (or written in the docs) when you open a savings account.

        Furthermore, bank account statemens typically say or imply “Account 1234 in the name of”, not “Loan 1234 received from”. It’s like when you *deposit* your coat at a coatroom or your car in a garage, you don’t expect your coat to be borrowed by other guests or your car driven by parking attendants (Ferris Bueller?). Most people expect their money to stay put, even if they have an inkling that the bank also lends money (a loan company also lends money but they don’t take deposits). So, if the banks have covered themselves in the legalese, one could still make a case of fraud by omission.

        • cb75075

          Well IF you deposited the gold with the agreement it will merely be kept and not loaned then you are right the bank is lying when they loan it. But if you agree to them loaning it I don’t see what the debate is.

          • dave jr

            When money is deposited at a bank, one is essentially loaning money to the bank at their advertised rate of interest. What is not widely known is the bank sees it as no longer being your money. It is theirs to do with as they please and you are just a ledger entry trusting their integrity. But I agree, there is no debate there. The issue still is how new money is created because that defines what money is. Will promises of promises enforced by government promises do? Apparently. And FRB is the vehicle for that. For the life of me, I can’t understand how the DB and contributors can opine for sound money on the one hand and be permissive of FRB on the other.

          • “For the life of me, I can’t understand how the DB and contributors can opine for sound money on the one hand and be permissive of FRB on the other.” – dave jr

            Me either. Sound money has to be converted to irredeemable currency in order to engage in FRB. Debasement of currency was a capital crime according to America’s founding fathers. The death penalty was the punishment if found guilty. I don’t get it. It seems to me that perhaps many people don’t understand the difference between money, redeemable currency, and irredeemable currency.

        • Since my account earns interest, or at least has no maintenance charge (storage fee), I have always assumed that some portion of my deposits, beyond a reserve amount, was lent out in order for the bank to pay the interest or not charge a fee. What seems fraudulent is for the bank to have my 10 dollars and lend out an additional 90 it never received from anyone as a deposit.

          • jmafc

            Accounts that earn interest are almost by definition, loans from the depositor to the bank, and that’s why they’re generally not immediately available on demand or they have some other kind of restrictions such as minimum size of withdrawal or limits on the number of transactions per month. However, I’m primarily talking about (and presumably Wendy too, since she uses “demand” several times) is what Wikipedia defines as transactional accounts (https://en.wikipedia.org/wiki/Transactional_account ) which are available on demand and thus also fall under the definition of bailment. If there are fees associated with the account, they do *not* represent a storage fee since that is negligible if talking about paper money, but rather are “per transaction” fees, even if charged based on some other metric.

      • esqualido

        Recall that banking started when goldsmiths put customers’ gold in their secure vaults, issued them a receipt (and charged them for keeping their gold with them). These receipts began circulating as a medium of exchange. Fractional reserve banking started when goldsmiths began counterfeiting receipts! When you speak about the bank’s lending your gold out “for interest”,it is not interest that you collect- they get it. And you are up the creek if the borrower fails to return it. Ask Gerald Celente about his gold bars at MF Global that “vanished.”

        • cb75075

          That’s a process over 100s of years. What you describe is a jaundiced, compacted example. That FRB didn’t happen immediately over night.

          If the depositor knows the terms of agreement then FRBing is between the bank and the depositor.

          HOW are you going to stop that? With the same gov that empowered the Federal Reserve?

          • esqualido

            The process I described morphed into the modern version where the U.S. banks held just $40 in bullion for every $100 currency issued. When Britain went off the gold standard in 1931, that was enough to clean out one bank after another and trigger the Great Depression here. There is nothing “ancient” or “jaundice” about that, and het, by today’s standard, where a bank only had to have $5-$10 in PAPER backing $100 in loans, that earlier standard, as dishonest as it was, was vastly more sound than the fraudulent system that exists today.

          • cb75075

            You’re not tracking what you wrote. The example YOU gave of the banker was a compacted example.

  • Brent

    I do believe fractional reserve banking is fraud, but I agree with you in regards to your “informed consent” argument and I disagree with Block on this. I believe the issue here is a disagreement on definitions. I define a deposit or demand deposit as a contract where I deposit my money with a bank and I retain ownership of the money. When the bank loans money to a third party, the ownership of the money is transferred to the third party in exchange for a promise to pay back the money at a later date. In fractional reserve banking the depositor and/or the recipient of the loan is being defrauded (unless they understand the nature of the contract- then it isn’t really a deposit but a loan). I define fractional reserve banking as fraudulent because by definition fractional reserve banking is loaning out deposits (where the depositor retains ownership of the money) without both the depositor and recipient of the loan understanding the nature of the contract- therefore fraud is committed. If they both understand the nature of the contract then it really isn’t a deposit but a loan. It is perfectly acceptable for any fraction of a loan made to a bank to subsequently be loaned out to a third party. In that case, I disagree with Block that it is unacceptable for the loan to be required to be repayed on demand. While this may be a bad business practice for a bank to loan out money to a third party and simultaneously be required to repay the money on demand, I don’t see how this would be fraudulent, but Block and De Soto go to great lengths in arguing that even this should be fraudulent as it resembles fraction reserve banking. In my own email exchange with De Soto I argued that using his reasoning it would be fraudulent for me to loan $10 to my friend on the condition that he must repay when I ask him to repay it (on demand). His reasoning was that a loan must have a specific loan repayment
    schedule, otherwise it would too closely resemble fractional reserve banking.

    • WinChll

      Have you read the White paper from FDIC and Bank of England? Seems depositors’ money is unsecured. Can you spell b-a-i-l-i-n? Think Cyprus.

  • dbhalling

    Fractional reserve banking, FRB, is just a way of securitizing assets other than gold or silver. The FRBs are backing notes by land and other assets, not just gold (silver). There is no logical reason that notes should only be back by metals. For more information see http://hallingblog.com/understanding-the-coming-financial-collapse-central-banking-fraction-reserve-banking-and-legal-tender-laws/

    • dave jr

      I wish I could believe that because then I would have no issue with the practice that is currently called FRB. The article you linked to kind of contradicts itself on this particular matter. Oh well. Eyes wide open and forward. Maybe someday the truth will be known.

    • WinChll

      As stated by Rep. Patman during the 1933 Bankruptcy Act Session: “Under the new law the money is issued to the banks in return for Government obligations, bills of exchange, drafts, notes, trade acceptances, and banker’s acceptances. The money will be worth 100 cents on the dollar, because it is backed by the credit of the Nation. It will represent a mortgage on all the homes and other property of all the people in the Nation.”

      See pgs. 82-83 of Record: http://unmasker4maine.files.wordpress.com/2011/01/janet-1933-march_9th-77congrec41.pdf

  • kenvandoren

    I have read the works of Wendy McElroy for over 30 years, and in that time, this is the piece I find myself most in disagreement with. I was on a radio show once, talking about a variety of topics and mentioned the role of the FED. Soon a caller pointed out that what banks do is engage in multiple use of money. Intriguing concept, built 100% on fraud as I hope my argements show. One of the roles of currency is as a store of value, or looked at another way, a store of the labor used to create wealth. So I, as a wealth creator and depositer only get to use my money once. I can choose between several items costing say, $10,000/ I can buy a boat, a used car, put a down payment on a modest piece of property, but I can only do one of those things. The bank on the other hand,, can take my money and do all those things or loan it to those who will. AND the new loans created based on that activity act as new deposits. Only problems? This new money ONLY has value as it dilutes the value of that already in existence, in effect, stealing from the productive, while providing the banks the opportunity to charge interest on money they created, out of thin air, as Rothbard would say. Again, per ROthbard, banks are somewhat constrained by the fat that they must have one dollar in deposit (more or less, depending on reserve requirements) to leverage the 10:1 ratio. The FED on the other hand, has no reserve requirements. While certainly there would be a role for banks in a free society, the system as is, skews wealth toward the financiers and the big businesses associated with them. Too-Big_To_Fail banks are bigger now and have greater market share than before the taxpayers and the FED bailed them out. The rich get richer and the poor and middle class are lucky to mark time. This is not so much because of any economic acumen on the part of the banksters and their friends in big business, but because of their political connections and their ability to create money from nothing.

    • dave jr

      “The FED on the other hand, has no reserve requirements.”
      Well the Fed can only authorize its member banks to create new currency at the 10:1 ratio. But with the Fed working hand in hand with Gov, and its rolling thunder of ‘national’ debt, and various forms of QE (blatantly fraudulent) as of late; it could be said that the Fed has no reserve requirements other than the amount of ‘confidence’ it can now garner and maintain.

      • Pete

        @dave jr:reserve requirements are not carved in stone and can be suspended arbitrarily. But more importantly, the “reserves” come AFTER the money is created out of thin air in the first place. Banks simply create credit out of thin air when the debtor signs the loan documents. The “reserve requirements” are more of an accounting rule for member banks to follow, but this “rule” can be suspended at any time.

        This debt-enslavement, counterfeiting system is described by G. Edward Griffin in “The Creature from Jeckyl Island” as “The Mandrake Mechanism.” Ellen Brown also correctly identifies the scam in her book, “Web of Debt” (although her plan for state-owned banks is questionable). Mish Shedlock has also demonstrated that reserves come AFTER the initial counterfeiting of so-called money. So has Byron Dale.

        The author of this article, Wendy McElroy is using a 19th century definition of FRB that doesn’t match the reality of contemporary debt-currency. I can’t tell if she’s misinformed or a misinformation agent, but she seems too intelligent to be the former.

    • Pete

      KEN VAN DOREN FOR CONGRESS! Hey Ken, great comment. I wrote one, too, but we’ll see if they publish it. -Pete

    • Russian Guyavich

      You’re absolutely right with the boat/car/etc. analogy, “Money” lent by banks is no different than counterfeiting – it dilutes hard money, but “looks” like hard money (e.g. it doesn’t say it’s an IOU). Sadly, nothing will ever change and history will repeat like it has for thousands of years – especially if all we have to read are banal articles like this one.

  • dave jr

    If all currency notes were backed by assets like gold, silver, real bills, mortgages, real property or any other sufficient collateral, then we would have 100% reserve banking. What FRB essentially does is create several claims to any given amount of asset. Call it fraudulent or not, but naturally this is problematic. And if there truly had been full disclosure back in the day, bank runs would have been manageable. FRB allows banks to make unsecured loans, engage in risky speculative ventures and grow government, just to name a few. Central Banking has worked hard over the last century to get around the pitfalls of, and preserve the practice of FRB. First it had to buy legislation to get a foot into government to begin monopolizing the industry, manipulate interest rates, get rid of redeemable currency, kill Real Bills, create FDIC, create legal tender law, buy more legislation to support cronies on Wall Street and big industry and finally to export it all to the world. None of which would be possible or would have been very difficult at the very least without FRB. So if we have nothing to complain about, then FRB is just fine and dandy. Nothing to look at here folks, just move along.

    • Arhur Krolman

      “get rid of redeemable currency” Enforced by threats of violence.
      “create legal tender law” Enforced by threats of violence.
      Initiating fraud is not the problem. Initiating violence is the problem.

      • dave jr

        That’s fine. But with that line of logic, whenever you are infringed upon; you’d better not try to defend yourself, else you are initiating violence. I’d rather say fraud IS a subtle form of violence as the harm comes later, unnoticed through the back door. Then we’d be in agreement.

        • Arhur Krolman

          “whenever you are infringed upon; you’d better not try to defend yourself”
          By infringed, I think you mean deceived. By defend, I think you mean respond with violence against person or property. Agreed. I will not defend myself if I am infringed upon. Nor should any libertarian in my opinion. Rather, if he wishes to be insulated from the unpleasantness of deception, he should reduce risk taking in his trading. This can be done by due diligence and insisting on contracts with third-party arbitration clauses among other entrepreneurial problem-solving means.
          I assume you would agree that it would be silly if Wendy titled her essay “Fractional-Reserve Banking is Not Violence”. A cat is not a back door dog. Fraud is not back door violence. Words matter. Clarity matters. Especially if libertarians wish to refine and strengthen libertarian theory.

          • dave jr

            You’re right, clarity matters. I should have said fraud is a subtle form of aggression, not violence. NAP is about the initiation of aggression. Is aggression limited to physical violence or could aggression encompass anything that another does to cause you harm or hardship? Does it have to be proven to be direct or intentional or does a case of being peripheral or collateral damage count? Whenever aggression is initiated against anyone, does the NAP forbid any or all self defense? Are you saying that any nonviolent aggression initiated on one is their own fault for being unaware, so stand down? Do you wish to advertise, that so long as no physical violence is used, you can do whatever you want to me with no repercussions? Is living in a lock down mode conducive to life liberty and the pursuit of happiness? How far can libertarianism and the NAP be taken as an excuse for harboring fear and timidity?

          • Arhur Krolman

            ” Is aggression limited to physical violence”
            This is basically my argument, yes. I would prefer to jettison the word aggression because it is too vague (we agree that clarity is better). I would prefer a libertarian Non-Violence Principle in place of the NAP something like: libertarianism proscribes the initiation of non-consensual violence or threat of violence against person or property. Violence against person is more colloquially understandable. I admit that violence against property sounds strange. But what I mean with that is trespass or taking without the voluntary consent of the property owner. To me, two parties who voluntarily exchange property titles are not engaged in violence against person or property. Even if one is a fooler and the other is a fool.

            “Are you saying that any nonviolent aggression initiated on one is their own fault for being unaware, so stand down?” Essentially, yes. Although I would prefer removal of the “for being unaware” part. It could be because they wilfully exposed themselves to risk. Maybe they just thought the time and expense of getting the counterparty to agree to a contract with a third-party arbitration clause wasn’t worth it.

            “Do you wish to advertise, that so long as no physical violence is used, you can do whatever you want to me with no repercussions?”
            Well there certainly are repercussions to deceiving people. Just like there are repercussions if you decide to become a prostitute to save up for a nice wedding. But should libertarians call for violence against adults deciding to deceive others or rent their bodies? I say no.
            I’m sorry, but I don’t understand what you mean by “lock down mode” etc.

  • Gina

    Much has been said on many points, and I hesitate to add more, … but I feel compelled. I do not believe that the view / position that Wendy takes cannot happen, but rather that it will always rely upon the honesty of the “banker” to uphold that ideal practice. My opinion is that once an FRB practice is allowed it will always devolve into the system we have today because of greed, envy, lust for power, and other human frailties. After these current experiences, where the entire world is watching the resultant devolution of the world-wide imposed FRB system, will we learn to avoid it in future? I hope so.

  • WinChll

    “Let’s say everyone wants 100% of their money at the same time. Has the FRB committed fraud when it cannot deliver”

    Yes, all those gold certificates of yesteryear that banks could not deliver on, prompting FDR to close the banks while the money masters created their new currency. LOL’s. The more things change, the more they stay the same.

  • Excellent article, reasoning and logic, Wendy. It would simply be a matter of market competition between banks for which one was able give the best interest rates, from being able to make the most return from loans and investments of its depositor’s funds, while still keeping sufficient reserves to deal with the natural changes in the daily withdrawal rate. The other thing to realize is that without State activities continually creating crisis situations, long term market estimations would be much easier than now and the ups and downs of the market would be much smoother and more predictable.

  • Darquius

    The Scottish FRB system I hadn’t known about. THANK YOU for including outline of it. Fits with (ammunition for) the idea of abolishing the FED, by gradually replacing it’s initial functions, so it becomes irrelevant irrelevant in light of a proven side-by-side alternate choice system.

  • Anonymous

    Why are gold coins different than harvested wheat grains? A futures market for commodities sells farm products which don’t exist yet. If you want to do fractional reserve banking honestly, call it a “mutual fund” and put language in the prospectus that redemptions may be delayed, and that a run on redemptions may cause you not to get your principal back. Do not claim shares of the mutual fund are as good as money or identical to money, they aren’t.

  • When all and every bank is subject to THE SAME regulations governing the ratio of assets to reserves, ALL immediately go to that level and attempt to stay there (even at risk of edging beyond the regulations at intervals). What’s wrong is NOT lending in excess of reserves, but REGULATING the ratio that such lending may proceed to (and tinkering with those regulations advantageously). Allowing any and every bank to set its own ratio and observe it (or not) would be free banking, and it would offer, contrary to the situation today, a CHOICE to depositors: a 100%-reserve choice (expensive), a 10%-reserve choice (risky, but high returns), a 20%-reserve choice, and so on.

    Banks that culpably exceeded their advertised ratios, of course, WOULD be guilty of fraud, and prosecutable for it, too.

  • Brent

    When one reads Rothbard in regards to fractional reserve banking, he always distinguishes between deposit banking (where the depositor retains ownership of the deposit) and loan banking. When you discuss “fractional reserve banking” you are really referring to loan banking and most of us who regard fractional reserve banking as fraudulent (such as myself) have no objection to loan banking. However, if it is deposit banking, 100% of the deposits must be kept as reserves. Of course, if there is “informed consent” between both the “depositor” and the 3rd party receiving the loan then it is not really a deposit but a loan. In loan banking, I loan say $100 to the bank and the bank subsequently loans out the $100 (or any portion thereof) to a 3rd party. In this case, the ownership of the $100 must be transferred first to the bank and then the 3rd party. If ownership of the $100 is not transferred then the 3rd party cannot spend the money without committing fraud, because those receiving the $100 would certainly believe they own the money after receiving it for goods or services. In deposit banking on the other hand, the depositor retains ownership of the $100 and therefore the bank cannot transfer ownership of the $100 to a 3rd party without committing fraud. In a 100% free market there should be free banking, not the sort where fractional reserve banking is acceptable, but one where private property rules are respected. A bank customer should have a choice either to enter into a contract with the bank where their money is either loaned to the bank (loan banking) or their money is held by the bank but ownership is retained by the depositor (or at least the money is held in trust, but I believe most customers in a free market would choose an arrangement where their ownership of the deposit is retained vice the money being held in trust). In a free market, bank customers will get to choose which contract they enter into with a bank and it will be clear cut and not a “muddled, pretend” arrangement that we have today where we pretend the depositor retains ownership, but in fact they are really loaning their money to the bank to subsequently be loaned out to 3rd parties. If you were to ask most customers of a checking account who owns the money most would likely answer they do, although really the bank owns it (this is proof that the current system is fraudulent in my opinion).

  • esqualido

    “Fractional-Reserve Banking is Not Fraud”” The hell it’s not. When Britain went off the gold standard in 1931, leaving 100-year consol holders (at 1%) in rthe dust, savvy Americans saw that they could be next and began exchanging their gold certificates (read “dollars”) for bullion, as prescribed by law. But the banks only had $40 worth of gold for every $100 issued, and began to fall one after another: fractional reserve banking. This was the trigger for the Great Depression.

    • David Horace

      Bingo. That’s why the bankers were so eager to create paper money. With gold, where did the additional gold come from to pay the interest on the debt? Much too difficult and cumbersome for the bankers. Paper money solves that problem inherent in a fractional-reserve system. Just create the new money to pay the interest as needed… and start shopping for a home in the Hamptons.

  • wraft

    When one has no model of the aggregate economy, like the Austrians, all answers to all questions are equally valid.

  • Curby Weaver

    “Thou shalt not steal” Exodus 20:15 The seventh commandment of God.

    Not all fraud is theft, and not all theft is fraud.

    Fraud or not, fractional reserve banking is theft as it dilutes the money supply and thus reducing its value depriving people of the value of their principle means of storing wealth earned by their labor.

  • Pete

    I think this author is working for the trillionaire bankers, and her job is misinformation. There is no “informed consent.” Maybe one out of ten thousand debt slaves realizes that an elite group of people called bankers have a monopoly to create all of our so-called “money” out of thin air when the loan documents are signed by the debtor. If they wanted the sheeple to know this, there would be a written disclosure in the “loan” documents (there isn’t). Or perhaps it would be taught in the mandatory indoctrination centers…er, “public schools” (It isn’t). BTW, a legal contract requires a “meeting of the minds” between both parties for the contract to be valid. Does the author really believe that the debtors understand that the legalized-counterfeiting parasite is creating the so-called “money” upon signature of the loan documents? Even most bank employees are unaware of how the scheme works.

    Furthermore, there are no “reserves” needed before the banker creates bank credit out of thin air. Mike “Mish” Shedlock did a great article a while back demonstrating that the “reserves” come AFTER the money creation. Byron Dale got the P.R. people ar the U.S. treasury department to admit as much in correspondence and the letters a re published in his book, “Tales from the Treasury.” Anyone claiming that the bankers require “reserves” before creating money out of thin air is either misinformed, or, more likely a misinformation agent. Unfortunately, this includes a lot of the leaders of the Austrian School and the CATO Institute crowd.

    • Whjy insult the author? Your comment is needlessly inflammatory.

      • David Horace

        Because the author is wrong but holds herself out as an expert.
        Another example of her misinformation: She equates asking for YOUR OWN money in a demand-deposit account at a bank, with filing an insurance claim. Filing an insurance claim requires that there be a loss caused by an insured peril.

    • kenvandoren

      While I disagree on this one piece she has written, overall, Wendy has been great for the movement and I am a fan.

      • Pete

        @Ken: That’s how gate keepers and misinformation agents work. They need to be 95% truthful in order to sell the lie.

  • ManAboutDallas

    The whole problem with FRB can be summed up in one sentence : It’s simply impossible, due to human nature, to resist the temptation to keep reducing the fraction to ZERO.

  • wraft

    The real economy grows through population growth (1.3%) and productivity growth (2.5%). Thus, if more credit than real growth is extended, those loans are unproductive. Doing this on a mass scale creates debt slaves.

    With free banking, lending banks are at risk of bankruptcy. If they make unsound loans, they go out of business and they take their bad loans with them. Scottish free banks during the 1840s were an exception because there was explosive capitalization at the start of the Industrial Revolution. Those banks routinely lent on 2% reserves. FRB is only sound during a boom like that. In normal times, excess lending goes into stock speculation as in the 1920s or else it jacks up house prices as in the recent boom.

  • StephanLarose

    Banks do far more than simply lend out actual money depositors have in their accounts, they create anywhere from 10-100 times that amount of money out of thin air. By the narrow definitions and opinions listed above, it’s not fraud or theft, however, this practice doesn’t pass the test of common sense. If you or I tried to do the same we’d be arrested for counterfeiting. Thus, what banks do is simply legal counterfeiting.

    What effect does this have on the economy? For one, it is the source of nearly all inflation. Second, it allows banks to perilously multiply the risk they take by being less careful with the loans they make since they can make so many more. Third, it deprives the common depositor the right to profit from the use of their money. What we have seen in the world since the advent of fractional reserve banking and national central banks is instability in markets with massive crashes at least every ten years, huge transfers of wealth to the wealthiest among us who are in a position to take advantage of this system, lawlessness in the banking/financial sector as they buy politicians and get rules that facilitate bank/financial profits at the cost of everyone else’s.

    Fractional reserve lending may have some utility to society, but since banks use other people’s money to make their profits, those profits belong to the people, not the bank. Also, allowing a bank to engage in legal counterfeit is a huge moral hazard. Unless the profits realized are shared equitably with those whose money is used to make these profits, this practice should end.

    Banks should be turned into public utilities which are far more stringently regulated than they are now. Their ability to leverage deposits into loans should be curtailed so as to reduce the risk of inflation and restore confidence into the fiat money system, and all profits of these public utilities should be shared directly with the people on whom the wealth and value of the currency is based on in the first place, not just the government (though government should take a cut too to bring down our taxes) but to the people themselves directly. The system won’t work properly until it passes basic tests of moral truism and math, and is regulated strictly enough to stop white collar criminals from causing multi-trillion dollar global financial panics and crashes. It’s not asking for much, just common sense.

  • Love your work wendy. Disagree with you on this one. It is fraud. Here’s why. The argument regarding illogical is close to the reason, but not quite. Something can be illogical, but still possible. But fractional reserve banking is impossible. Let’s assume only one depositor just for example, but it still works with multiple depositors. It is not possible for the banker to lender out the depositors money AND allow the depositor to retrieve it on demand. That is not just illogical, but impossible. You can’t consent to something impossible. Insurance is different because of the terms of contract.

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