Is there anything at all wrong with fractional-reserve banking?

[whorfin]

@IdahoMauleMan

To me the fundamental, bedrock layman’s explanation of why fractional-reserve banking is a fraud (to paraphrase Rothbard) and cannot work is because two parties are simultaneously claiming the same asset.

There are many reasons why this is wrong. The argument is that #1–the person the bank lends money to, “borrower,” and #2–the person depositing money at the bank, “depositor” each have a claim on the same dollars.

Now, first of all, you have to get past the hurdle that most depositors, if you ask them, understand completely that the bank lends out some of its deposits, but keeps enough money to cover withdrawals as needed. So you have to claim a system is fraud even though both Bank, Borrower, and Depositor know what’s going on. That is hard.

But more importantly, if I deposit money with a bank, I am not claiming the asset. I have a right to claim it on demand. Those are very different. If I tried to withdraw money from my account, and the bank said “no, it’s lent to borrower”–THEN two people would claim the same asset. But if the ATM gives me dollar bills on demand, then I have just successfully claimed my asset.

Bank deposits, on the other hand, are loaned out whilst they are simultaneously allowed to be claimed at any time by the depositors. And the depositors’ funds are even guaranteed by the government (meaning: you and me) to boot.

That is a fundamental fraud - allowed by, regulated by, and even sanctioned by the government. The government outlaws it in every other industry except for banking. Rothbard has some examples in his book of where other industries such as grain elevator companies have tried this, and have had the practice struck down by the courts.

Simple version: Grain elevators are not banks.
More complex: This is one of Rothbard’s funniest arguments. As you and I discussed in a previous thread, his argument that grain elevators couldn’t do this was based on the fact that the government declared it to be fraud.

So the argument is: Government says X is fraud. X is like Y. So Y is fraud. Except the government says Y is not fraud. So the argument is based on the government’s definition of fraud in the context of grain elevators, and is being used to override the government’s definition that fractional reserve banking is not fraud.

ETA: here is my response from the prior thread. It speaks for itself. The thread itself is useful to read. N.B. DDA’s=what IdahoMauleMan is talking about when he’s talking about grain elevators.

@IdahoMauleMan

Rothbard’s position is that the very nature of DDAs and fractional-reserve banking is illegal (because the government has ruled that it is illegal for other non-money commodities, like grain…an inconsistency he points out) and therefore should be outlawed.

@whorfin

Cite for how this is illegal with Grain? I can go down to the chicago futures market, and buy a contract to purchase grain a year from now from someone who doesn’t have any grain now, and doesn’t farm grain.

But even assuming that that’s true, If his argument is just “it’s illegal”–and he defines illegality based on what the government says to be illegal, it’s patently silly. Observe:

(1) DDAs are illegal.

—Why?

(2) Because this kind of contract is defined as illegal in other contexts.

—Who says it’s illegal?

(3) the government

—But doesn’t the government also say that fractional reserves are legal in the context of banks?

(4) Yes, but we shouldn’t listen to what the government says is illegal HERE–instead, let’s look to what the government says is illegal ELSEWHERE, in order to overrule what the government itself is saying HERE