More Than Quibbles: Problems with the Theory and History of Fractional Reserve Free Banking

Abstract

The extensive debate over fractional reserve free banking (FRFB) has spanned decades and includes volleys from many contributors. Consequently, relative newcomers to the controversy often wish to extend the conversation on several fronts. In this spirit, Bagus and Howden (2010) is a 27-page paper detailing numerous objections to FRFB, which they modestly entitled, "Fractional Reserve Free Banking: Some Quibbles." The present paper continues in this tradition, elaborating on some of the key critiques of FRFB raised by others earlier in the debate. In particular, I critically explore two key claims of the FRFB camp: that holders of banknotes implicitly lend funds to the issuing bank, and that the historical periods of relatively free banking illustrate the stability of the system.

Principles of Monetary & Financial Sustainability and Wellbeing in a Post-COVID-19 World: The Crisis and Its Management

“…A fractional reserve banking system does not only imply severe ethical and legal problem [75][76][77][78][79][80][81], it also exerts economic consequences such as redistribution [82] and recurring cycles of boom and bust. These business cycles portray the inherent instability of a fractional reserve banking system which has been analyzed extensively in the literature [83][84][85][86][87][88]. Moreover, as banks can fail (due to risky and hazardous practices), governments enforce a deposit insurance model to protect depositors with the support of central banks instead of encouraging a bail-in of bank creditors in case of bank troubles [89,90].…”

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